What Hedge Fund Failures Can Teach Us About Risk

In the world of high finance, you’d expect the biggest risks to come from bold bets gone wrong — poor stock picks, overleveraged trades, or failed investment theses. But the reality is far more mundane… and far more alarming.

Over 50% of hedge fund failures have nothing to do with performance. They fail because of operational risk.

Let that sink in: the biggest existential threat in one of the most sophisticated asset classes in the world isn’t market volatility or strategy misfires — it’s internal breakdown. Poor controls. Compliance lapses. Back-office blind spots. These are the culprits that silently take firms down.

This stat has stuck with me for a long time. But lately, it's collided with another trend I’ve been thinking about:

AI is replacing operational support first.

From startups to billion-dollar institutions, we’re automating core workflows — bookkeeping, compliance checks, data entry, scheduling, even fund administration. These are the functions that kept the lights on. The people who ran them weren’t flashy, but they were essential.

Now they’re the first in line to be replaced.

The upside is obvious: AI promises to streamline execution, eliminate human error, and scale ops without bloating headcount. Done right, it could actually reduce operational risk. But there’s a paradox here worth naming:

We’re automating the very function that, when neglected, has historically caused the most damage.

If half of hedge fund failures stem from operational fragility, how are we thinking about ops in other industries? What does “automation risk” look like when the bots get it wrong, or when oversight becomes too thin?

I’m not here to argue that AI is inherently dangerous. In fact, I believe it can be a force multiplier for strong ops teams — augmenting rather than replacing the humans who design and oversee these systems.

But I do think there’s a reckoning coming. And it starts by recognizing that operations aren’t just a support function — they’re a safeguard. When you gut that layer, even with the best intentions, you need to know what’s being lost — and what new vulnerabilities are being introduced.

The hedge fund asset class is more than $4.5T — if it sees 50% of fund failure from ops, how do we think this plays out in startups?

(Sharing a recreated version of one of my favorite charts: Capco’s breakdown of hedge fund failures by cause. Article linked here)