Hedge funds have been getting throttled since the beginning of 2016, and because of that people are starting to ask questions about their worth.As you know, people tend not to ask questions when they are making money.All of a sudden, investors want to know how their money was lost, and what strategies and thought processes contributed to it vanishing into the market ether.They do, after all, pay very high fees for the services of hedge fund managers.And so, in the spirit of pursuing that knowledge, Business Insider's Rachael Levy published excerpts of private due-diligence documents from ValueAct Capital, the almost $16 billion activist hedge fund.It shows you exactly why investors are getting sick and tired of hedge funds.The docsHere's what we learned from the documents. First, ValueAct doesn't think that it has to benchmark itself against any metric in the market. It stands alone on whether it makes you money or not.This is a recurring theme in the hedge fund industry. When they beat the benchmark, they'll point it out as a sign of success. When they fail to beat the benchmark, they'll argue that they offer uncorrelated returns, and they should never have been compared to a benchmark in the first place.In other words, the metric that matters on Wall Street is the one that makes you look good.That's why, according to ValueAct, you should throw your money at them and then just say, "Awesome, thanks."For the record,ValueAct was down 2.2% in 2015.The documents also disclosed that ValueAct invests only in large companiesabove $3 billion. That leaves a lot of companies, and yet ValueAct's biggest holdings aren't that imaginative.For example, ValueAct's biggest position at the end of the second quarter, according to the fund's most recent 13F, was Microsoft, a stock that is hugely popular with hedge funds. According to Goldman Sachs' hedge fund VIP list, no fewer than 49 hedge funds have Microsoft as one of their ten biggest positions.ValueActalsohas big positions in Baker Hughes and Willis Towers Watson, two other stocks with a high percentage of hedge fund ownership, at around 16% and 17% respectively. It is also a shareholder in hedge fund horrow show Valeant.The last key thing we learned from these documents is that if ValueAct investors want to know where their money is going, then they have to sign a nondisclosure agreement.This makes sense. Hedge funds started out as small, secretive institutions available to only the most elite investors. The last thing any hedge fund manager needed was some loudmouth drunk investor talking about the fund's position at the Maidstone Club some afternoon.But in a world where hedge fund managers are constantly talking to each other at conferences and idea dinners, where long positions are disclosed on a quarterly basis, we see how this could be a bit onerous, too.When they comeThe questions also tend to come when your hedge fund has to pay an $11 million settlement with the US Department of Justice for failing to properly notify authoritiesthat it was buying shares of Halliburton and Baker Hughes during their proposed merger in order to influence its outcome. ValueAct tried to argue that it was acting as a passive investornot really itsthing by definitionbut the government didn't buy it.This is much like the argument that Bill Ackman and Valeant Pharmaceuticals are making in a California court right now. Both are being sued by investors in Allergan, the drugmaker, on allegations of insider trading. In 2014, Ackman and Valeant teamed up in order to push Allergan into a Valeant hostile takeover. It didn't work, but since Ackman and Valeant had bought a bunch of Allergan stock in order to influence the board to accept the deal, they made a killing anyway when a white knight bought Allergan.Another big investor in Valeant at the time wasand still isValueAct. It had gotten into Valeant before Ackman came along and, according to the insider-trading complaint, Mason Morfit, its president, was part of the team that tried to decide if doing this Valeant-Ackman tag-team deal would be a good idea.From the complaint:"On February 19, 2014, Morfit, members of Valeant's senior management and its audit and risk committee discussed the structure of the contemplated Allergan acquisition with their lawyers from Sullivan & Cromwell and Osler, and formally decided to move forward. The next day, February 20, Valeant and Pershing amended the February 9, 2014 Confidentiality Agreement. Over the next five days, between February 20, 2014 and February 25, 2014, Valeant, Pershing and their respective counsel negotiated the letter agreement and the terms pursuant to which Ackman would acquire the nearly 10% toehold in Allergan common stock."As you probably know, Valeant has since become a hedge fund graveyard. The stock is down around 90% since October, when government scrutiny over the company's high drug prices and accusations of malfeasance from a short seller revealing a secret in-house pharmacy called Philidor forced its collapse.Think about it: Valeant boughtthe option to buy Philidor for $100 million, consolidated Philidor's revenue into its own accounting, and was allegedly perpetrating insurance fraud with itaccording to an investigation by US Attorney Preet Bhararaand ValueAct, an investor in the company for years, was blindsided by Philidor's existence.Of course, so was much of the rest of hedge fund land.In its documents, ValueAct says that it takes a bottom-up approach to stock picking. First it looks at the stock, then the sector, and so forth.Ideally, one would find a Philidor at the bottom of this approach. Ideally.Two kinds of crowdsPart of what is ruining hedge funds, any hedge fund manager will tell you, is that they're all chasing the same ideas these days. It was fine when everyone was also making money being in the same 20 stocks, but now they're not.That is why a bunch of money is getting thrown into passively managed funds. If you're going to make only a few percentage points on your money, thenyou might as well do it cheaply.ValueAct just announced a $1.1 billion stake in Morgan Stanley. It also said that it doesn't plan to shake up the company in any meaningful way, though analysts have argued that the bank has much to do if it wants to reach its goal of 10% return on equityit's at about 8% now. That lack of action defies ValueAct's name and purpose.Any investor might as well just turn around and buy the stock themselves, really.The conditions for our low-yield world aren't necessarily going away, either, so this is a trend that probably isn't going away.Hedge funds that can't make the cut are going to get stomped out, and documents like ValueAct's show you a little bit of why investors are likely all too ready to tell hedge funds to take a hike.SEE ALSO:A handful of hedge funds just made a play that screams 'out of ideas'DON'T MISS:A look inside the huge hedge fund that just went big on Morgan StanleyJoin the conversation about this storyNOW WATCH: Hedge fund manager explains why America does not need to be uneasy about a Trump presidency
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