Thursday, October 23, 2008

Cold winds a blowin

Was at a small hedge fund industry do where the panel droned on and on about the credit crisis and how bad it was gonna get and finally somebody asked an obvious question: where's the alpha these days? Where can profit be made? And of course, nobody had an answer, though one of the guys on the panel was actually buying up loans and helping homeowners restructure and refinance them within an FHA program, which is actually the kind of thing you like to hear.

But really, there are few good answers out there, and in the absence of good answers the question is: what about those fees? How can hedge funds charge the fable "2 and 20"? Who wants to pay Steven Cohen 3% to sit in cash? And indeed, we're hearing more and more about pressure on hedge fund fees. One guy I was talking to was talking about doing away with incentive fee altogether in a fund of funds, with a 1% fee. Which starts to sound mutual fund like.

I think the hedge fund industry is going to pull back from $1.9 trillion under management to $1-1.2 trillion, and a third to a half of the funds will shut down. When its assets go down far enough, new strategies will emerge and they won't be so crowded. The money that gets pulled from hedge funds will flow back to equity markets in indices, or to fixed income, or to real estate, or to Subway franchises, but the fee layer will be taken out.


Anonymous said...

You're right. A fool and his money are soon parted. Hedge fund managers have long enjoyed a large number of wealthy fools. Now they are leaving, having discovered that the Emperor is indeed quite naked. Kinda like when one realizes all the superficial things the cool kids in school valued have no value at all.

Graham Hussein de las Piernas Gordas said...

Don't get me wrong, I don't think that all hedge funds are bad or that none of them can make money or add value to the economy. It's just that too much money flowed into them and there's not enough opportunity in the capital markets to accomodate them or talent in the labor markets to drive them. So, yeah, there have been a lot of fools on both sides. Also on the service provider side (yours truly). But it's not all bad. New skillsets and relationships have been formed that can be healthy. Even if total financial services headcount drops 20% as some predict, the people who've been in hedge funds have learned how to kick start and run small businesses. Some will see good opportunities and start other firms. Alternative investments have been a rare pocket of entrepreneurialism in a large corporation world.