To Hedge Fund or Not to Hedge Fund

Nearly 300 new hedge funds opened their doors for business [/embed] in the first quarter of 2011. This is the largest number of hedge fund launches since before the financial crisis, performance and asset tracker Hedge Fund Research reports.

Though it is getting easier than ever to open a hedge fund, it is becoming tougher and tougher to keep the lights on. From January-March of this year, 181 hedge funds went out of business, the highest level of liquidations since the first quarter of 2010. In the same quarter a year earlier, 240 funds shut down, while 158 closed during the fourth quarter of 2010.

It is interesting to see how things change in terms of perception and the HF industry is no different. Going back further than half a decade ago, anyone and everyone on Wall Street wanted to be a Hedge Fund guy. Today, you hear very little talk about it. Hedge funds have arguably become even more secretive than they originally were. This is like going from lurking in the shadows to living in an underground tunnel.

I am interested in why the discussion about this career path has died down (at least on WSO). If I were to take an industry pulse off simply this website, I would be left feeling strongly that young Wall Street guys have a lot less interest in the HF game than previous generations did.

Would I be correct in making this presumption? Have you guys been bitten by the bad rap many HFs have gotten lately? Is the higher likelihood of hedge fund failure coming into direct conflict with your own risk aversions? Or are hedge funds, perhaps just going out of style?

Once the rock stars of the street, hedge fund guys and gals have seemingly gone silent. Where are they? Why are they so quiet? Will they come back with a bang? Or have they gone out with a whimper?

Comments (18)

Jun 18, 2011

One would think that with prop desks at the banks having to deal with changing regulations- this should be a green light for prop shops, HFs, and the rest that don't have to adhere by the regulations. Maybe that helps to explain the motivation behind the 300ish that opened? I might be completely off though

Jun 18, 2011

Net inflows to HF are only going up, because pension plans are chasing returns. At the same time, most of those inflows are going to the largest funds. IMO, there's an opportunity for smaller funds because sooner or later the big boys returns will mimic the market too much and pension plans will have to change their mix within the HF they invest in.

I think the industry will continue to represent a growing percentage of overall AUM and will continue to steal share from mutual funds. That being said, there's a lot of churn, because the costs to starting a fund are relatively small but the potential benefits are so great.

As far as people actually desiring to go into the space, well I have no idea just how much that's changed, but I can't imagine someone turning down a HF job for anything other than a PE job. I'm sure that if I put up a posting for a position that I'd be flooded with applicants.

Just my 2 cents...

Jun 18, 2011
alexpasch:

Net inflows to HF are only going up, because pension plans are chasing returns. At the same time, most of those inflows are going to the largest funds. IMO, there's an opportunity for smaller funds because sooner or later the big boys returns will mimic the market too much and pension plans will have to change their mix within the HF they invest in.

what are your thoughts on pension fund returns ten years down the line?

I think the industry will continue to represent a growing percentage of overall AUM and will continue to steal share from mutual funds. That being said, there's a lot of churn, because the costs to starting a fund are relatively small but the potential benefits are so great.

which almost makes me think they may wind up taking over the mutual fund's roles...being that i see less and less selling points for mutual funds, which in turn gives the hedge funds less of an incentive to speculate...hmm, can two wrongs make a right?

As far as people actually desiring to go into the space, well I have no idea just how much that's changed, but I can't imagine someone turning down a HF job for anything other than a PE job. I'm sure that if I put up a posting for a position that I'd be flooded with applicants.

Just my 2 cents...

can't say i do either, but i don't see that 90's excitement about it (more recent, as well) where two strong years on a desk had guys thinking about their own fund

Jun 19, 2011
Midas Mulligan Magoo:

what are your thoughts on pension fund returns ten years down the line?

I think they will still miss their return targets (in real terms at least), but it won't be for lack of hedge fund exposure.

which almost makes me think they may wind up taking over the mutual fund's roles...being that i see less and less selling points for mutual funds, which in turn gives the hedge funds less of an incentive to speculate...hmm, can two wrongs make a right?

Yes, this is exactly what is happening. Hedge funds are reducing risk and are not like the old Quantum Fund hey days (my fund is a shout out to those times...high vol and high return baby!). HF are becoming very cookie cutter because they can get away with it (i.e. investors not bright enough to get what's actually going on). For example, you could buy covered calls on the S&P 500 and roll them every month. You'll have a higher Sharpe ratio than the S&P 500 index, even net of fees. Why invest in the Vanguard index mutual fund when you can invest in this hedge fund unless Sharpe ratio is a flawed metric (it is, but good luck convincing these simple-minded institutions otherwise)? This is a scenario where the Sharpe ratio is giving you a false recommendation. The Vanguard index fund is a better risk/return investment (not going to go into all the financial theory as to why, it has to do with going beyond the Sharpe ratio). They would be equivalent if the fees were the same, but the HF charges more fees.

can't say i do either, but i don't see that 90's excitement about it (more recent, as well) where two strong years on a desk had guys thinking about their own fund

No comment on this, not old enough to have a proper opinion.

Jun 18, 2011

I can tell you that running my own fund or working for a fund that is aligned to my market philosophy woud be ideal. I could care less to work for a PE fund.

The one who does not fall, does not stand up

Jun 18, 2011
ProdigyOfZen:

I can tell you that running my own fund or working for a fund that is aligned to my market philosophy woud be ideal. I could care less to work for a PE fund.

Yup, there's nothing better than working for a company that delivers a product you truly believe in.

Jun 18, 2011
alexpasch:
ProdigyOfZen:

I can tell you that running my own fund or working for a fund that is aligned to my market philosophy woud be ideal. I could care less to work for a PE fund.

Yup, there's nothing better than working for a company that delivers a product you truly believe in.

Echoing this. Starting my own SS/ED HF is my goal at 32 years young.

--
"Those who say don't know, and those who know don't say."

Jun 18, 2011

Running my own fund (and doing well) is pretty much my only career goal, although I'd prefer it to just be my family office (large enough that I can't hire/partner with some peeps).

Jun 18, 2011
Midas Mulligan Magoo:

Nearly 300 new hedge funds opened their doors for business [/embed]
Would I be correct in making this presumption? Have you guys been bitten by the bad rap many HFs have gotten lately? Is the higher likelihood of hedge fund failure coming into direct conflict with your own risk aversions? Or are hedge funds, perhaps just going out of style?

Couple of my friends (now associates in banking) used to work in HF's. I've asked this question before and the genreal consensus is that HF pays better and they liked i but the fact that they could be blown up on any given day is less appealing than the investment banking relative safety (i say safety lightly).

Just what I've heard.

Jun 18, 2011
Blue Baller:
Midas Mulligan Magoo:

Nearly 300 new hedge funds opened their doors for business [/embed]
Would I be correct in making this presumption? Have you guys been bitten by the bad rap many HFs have gotten lately? Is the higher likelihood of hedge fund failure coming into direct conflict with your own risk aversions? Or are hedge funds, perhaps just going out of style?

Couple of my friends (now associates in banking) used to work in HF's. I've asked this question before and the genreal consensus is that HF pays better and they liked i but the fact that they could be blown up on any given day is less appealing than the investment banking relative safety (i say safety lightly).

Just what I've heard.

^ This is my understanding as well. While bigger firms DO go down in a blaze of shame, it's far more common for a small fund to get shaken out by much smaller ripples than, say, the tech bust or the recent financial crisis - there's safety in numbers.

The other thing is this: you can build management skills at a larger organization that you simply can't at a small fund. The larger organization will have entire departments larger than many shops, and if one were so inclined to make CEO his goal as opposed to trading baller, then staying at a bank makes more sense in the long term. It really comes down to what the person is good at and what they're trying to accomplish (and where they can score a gig of course).

Jun 18, 2011

I'd have to say the recent exposure of all the insider trading, and more to come as Feds still have some investigations in the pipeline, makes me think if so many funds can't consistently generate high alphas taking directional bets without "cheating." I've interned for a very small hedge fund employing a global macro strategy before and while the PM nearly tripled the S&P from 06-07, the losses were exceeding S&P when I left in summer 08. Of course there are tons of arb strategies that involve program trading that might not rely on insider information but will those work consistently? Feel free to correct me as I'm sure I made a lot of generalizations.

One thing that still pulls me towards HFs is the flexibility of doing other things besides trading/investing. I'm sure many of you caught the dealbook article (http://dealbook.nytimes.com/2011/06/08/bank-said-n...) but I thought that was pretty interesting.

Jun 18, 2011

Would people take a top HF over a top PE firm? Im curious.

Jun 19, 2011

A couple of points here:

1) as long as the fee structure at hedge funds remains, it will be a desirable place to work if you have any signifigant piece of the pie. 2 and 20 adds up to a tremendous amount of money in goods years.
2) Any time hedge funds have a bad year, many of them shut down. This is simply because you dont get paid until you recover your high water mark...so many operators find it more profitable to shut down the fund and open a new one with a new high water mark as opposed to making back the money they lost. This may be immoral but unfortunately its how the business works at some places.
3) I have seen no diminishing interest in the hedge fund industry from recent college graduates.

More generally, a hedge fund is just a legal structure that allows a trader/speculator to be paid a performance fee and a management fee in a way that is beneficial from a tax perspective. Traders have been around for literally thousands of years. So whether it is called a "hedge fund' or something else, traders will always find a way to speculate on markets and that isnt going to change....its just a matter of whether they will use this particular form of incorporation.

Jun 20, 2011

Managing a business is entrepreneurship, not investing. Not all good traders will be able to run their own ship.

The legacy of a hedge fund is measured by the number of children fund that sprout up, like the Tiger cubs. Returns? Pfft, people make money one way or the other. There will be good times and there will be bad times.

Jul 4, 2016
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