It was an easy ticket to riches – becoming a hedge fund manager. However, it looks now like these entities weren't hedging much. If anything, they were rolling the dice with investors' money. And now we are seeing the huge unwinding of major hedge funds (what are now called "hedge fund failures"). The upshot has been extreme volatility.
Do hedge funds have a future? Perhaps. But things are likely to be grim. This week, a major hedge fund manager -- Citadel Investment Group's Ken Griffin – gave a presentation that affirms this outlook.
He says that the governments of the world are in the process of putting chains on hedge funds. At the same time, there will be lots of support for traditional commercial banking institutions. Thus, it's no surprise that Goldman Sachs (NYSE: GS) and Morgan Stanley (NYSE: MS) have quickly transformed themselves into banks -- even if it means lower profits.
So, with about 8,000 hedge funds and trillions in assets, it's going to be pretty tough to thrive in the new environment. In other words, expect consolidations as well as closures.
Besides, hedge funds were supposed to provide absolute returns in times of uncertainty. Instead, many funds have sustained losses. For hedge funds investors, there is much concern. Why pay the high fees if hedge funds are like any other fund?
Something else: hedge fund investors include pensions, endowments and foundations. Obviously, they are getting antsy about meeting their obligations, and no doubt, are rethinking the validity of placing large sums in hedge funds.
Finally, don't be surprised if Congress places some regulations on hedge funds – putting even more pressure on the industry.
Tom Taulli is the author of various books, including The Complete M&A Handbook
and The Streetsmart Guide to Short Selling: Techniques the Pros Use to Profit in Any Market
. He is also the founder of BizEquity, a valuation website.
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Reader Comments (Page 1 of 1)
10-24-2008 @ 12:22AM
Richard Wilson said...
I disagree. I've typed up a 300 word blog post explaining why here: http://richard-wilson.blogspot.com/2008/10/hedge-funds-will-be-extinct-by-q1-of.html
- Richard
10-25-2008 @ 11:06AM
williambanzai7 said...
They are funds, actually blind pools, but there is no hedging involved.
10-25-2008 @ 11:12AM
williambanzai7 said...
Mr. Wilson is probably right, there will be funds when the economy turns around. But I think they will no longer be called hedge funds. There is no "hedge". If there is where is it? They are vehicles for those too lazy or tied up to manage and mismanage their own investments. Glorified investment clubs.
11-12-2008 @ 8:13PM
Dave said...
There are still $1.3 trillion in hedge fund assets and those are not going away. However, some assets may shift from underperforming funds to better perfoming hedge funds.
For more info on hedge funds: http://hedgefundblogman.blogspot.com