Barclays Plc just upended one of the most common narratives for why hedge funds are struggling to repeat the glory years: It found it's not the number of funds that's causing returns to languish. It's their size. That calls into question a piece of wisdom so well received that even the industry itself has started to repeat it.

Barclays polled 340 investors with about $8 trillion in assets under management, and 74% of them said the primary reason for meager returns is that the industry itself has become too big. In fact, Barclays found, the malaise is much more likely to be a function of the fact that funds themselves are growing larger, and can't take the nimble gambles that generated high returns in the past. 

The issue is likely not the growth in size of the overall hedge fund industry, as there appears to be an ample supply of assets. The issue may be, however, the growth in size of many individual hedge funds, which are pursuing similar strategies leading to crowding.