Shortie at the ASI on The Economist’s report on the Hedge Fund Industry.
Timmy Elsewhere
7 responses
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You raise a very good point. This is almost a textbook case of how free markets are supposed to work. The modern twist is the whining and pleas for controls from those losing out to the forces of competition.
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I think you’ve fallen victim to a subeditor; in your passage “an innovation (which hedge funds most certainly were”, someone has snipped off the words “in 1949”.
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The same of course is happening in private equity – exceptional returns are being bid away. No coincidence that neiher has (yet) had the beneficial smoothing hand of regulation to initially reduce but ultimately guaranteee their margin.
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btw, I don’t agree that returns are being “bid away” in either hedge funds or private equity. What appears to me is happening is that the established players with good dealflow and genuine alpha are doing just about as well as they have always done, but a whole load of more marginal players have entered both games and got investment because there is a lot of money hanging round at present. This artificially lowers the average returns but does not imply that “it is getting harder to make money”. Even in genuinely capital-limited fields like convertibles arbitrage (where there is a limited supply of convertibles to arbitrage, at least in the short term), the “size effects” are IMO grossly exaggerated, usually by people looking for excuses.
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The problem surely is that it’s not like, say, the semiconductor industry, where early entrants made great profits, and now everyone makes ok profits, and all is ok. The returns hedge funds deliver to their customers over and above what is available else were was their selling point, wasn’t it?
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Seems like classic product life cycle stuff to me.
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My view is that the rise of hedge funds happened, in large part, because the rise of index-tracker funds happened. The investment management industry now has two basic business models: hedge funds and tracker funds. (Most non-hedge funds that claim to be active managers are effectively index-trackers that tweak the weightings of a few stocks in the index.)
It’s not just the fat performance fees that drive managers to set up hedge funds; rather, it’s the prospect of actually being able to make a decision more satisfying than “let’s recommend to the sub-committee on South-West European Financials that we underweight Banco di Acores by 0.1% – hell, let’s go out on a limb and make it 0.2%!”
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