Hedge funds are under pressure. John Paulson, the fund manager who was famous for his profitable betting on mortgage assets during the US financial crisis, closes his London office and is considering making his fund private. The actions of one of the most prominent figures in the industry are indicative of the problems facing the current model, which is struggling to find its role in the decade of cheap money after the crisis.

John Paulson is not the only one for whom the last ten years have been difficult. JPMorgan’s Highbridge Fund closed a large part of its business. Man Group’s assets, the largest public fund in the world, fell last year after the investment losses exceeded the proceeds. Lansdowne Partners, one of the oldest hedge funds in London, is also in trouble after a series of bad bets.

Last year, the total assets of hedge funds declined for the first time since the financial crisis, partly because of withdrawals from the funds. Many accuse the extra monetary policies adopted after the financial crisis.

According to traders, the quantitative easing that supported stocks, bonds, and real estate have reduced the opportunities for short sellers who benefit from the decline in asset value and stock options that can see opportunities, which others miss. Return on hedge funds has fallen from around 18% per year in the 1990s to nearly 3% in the second decade of the 21st century.

But many of the problems in the sector are due to it. High fees have come under the pressure of cheaper passive funds, which were well positioned to capitalize on the overall increase in asset prices. A few hedge funds still follow the traditional “2 and 20” model – 2% asset management fee and 20% profitability profit margin. According to a JPMorgan survey, management fees are currently close to 1.5% of the assets.

Another problem for investors is that it is difficult to distinguish really good managers from those who have just been lucky. John Paulson made a name with counter-pledges in 2007, but he had problems with the successful use of the proceeds that this reputation brought him after betting on gold, pharmaceuticals and against German bonds. Past performance does not guarantee future returns.

With most discerning investors trying to exploit the same market anomalies, it may be getting harder to beat the market. A more efficient market is good news for the public and the financial sector as a whole but not for hedge fund investors.

Evildoers like to criticize “predatory funds” and “financial sharks”, but carnivores improve the ecosystem. In the past, the hedge funds have been able to reposition themselves – they were very closed in the 1970s, but the industry began to revive and to attract institutional money in the 1990s.

Today, high returns mean that most companies charge higher than ever, companies such as Citadel and Millennium Management are charging additional fees in addition to management and profitability.

Ultimately, the hedge fund test will come at the next drop. The sector no longer refers to high returns but to the ability to keep capital in collapse – hedge fund depositor losses last year were less than those of passive index investors on the S&P 500. Hedge funds may have their own role in providing such protection but will have to reduce their fees.