"...that leaves long/ short hedge funds with some unappealing options. If they abandon their shorts, then they lose their hedge. Who want to pay sky-high hedge fund fees-- traditionally a 2% management fee and 20% of profits-- for a long-only stock portfolio that can be had for a fraction of the cost through a mutual or exchnge-traded fund? And if try to protect their shorts using options and other derivatives, the cost will drag down returns, possibly as much as 3% to 5% per year. After more than a decade of dissapointing performance, they can ill afford to squander precious percentage points."
To be clear, hedge fund fees have been shrinking for a while now as promised returns never materialized and very few hedge funds ever consistently generated positive returns from their short book. Investors had long started to question the merits of such higher fees for an activity that never generates alpha, but now they will have to contend with the business risks (and not just investment risks) of doing so.
And regulators are loathe to be seen helping hedge funds. In any case, from what we know, there does not seem to be much they can do. The Redditors have not broken any rules and any actions taken to "help stablize markets, blah, blah, blah" will only add to the widespread perception that the game is rigged in Wall Street's favor...just look at the anger Robinhood's restriction on GME trading stoked. So hedge funds are in a bind...many will need to adopt or wither.
PS: This sober post from Naked Capitalism takes the opposite view that Redditors' actions will change hedge fund and market behavior for the worse...hurting everyone.
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