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Hedge Funds ....

Discussion in 'Off Topic' started by Tropo, 7th Jun, 2006.

  1. Tropo

    Tropo Well-Known Member

    17th Aug, 2005
    Hedge Funds Star in a Picture We've Seen Before: Chet Currier

    June 6 (Bloomberg) -- We've been down this road before.

    That's the strong sensation that comes over me just about every time I happen upon some new status report on the growth and evolution of hedge funds.

    Don't get me wrong -- hedge funds are no clone of anything else. These partnerships designed primarily for well-heeled, sophisticated investors are distinctly different from any other money-management vehicle.

    If mutual funds are buses or minivans, then hedge funds are more like sports cars. They are faster, much more maneuverable - - and in most cases subject to proportionally greater risks.

    For all their differences, though, the progress of hedge funds has taken them over much the same route traveled by mutual funds 15 or so years ago.

    Mutual funds surpassed $1 trillion in assets at the dawn of the 1990s, and began attracting increased scrutiny from regulators and critics in the press. Hedge funds crossed the $1 trillion mark in the mid-'00s and, sure enough, acclaim started giving way to a more critical appraisal.

    The early mutual funds typically showcased individual managers known for their idiosyncratic ways. Where are they now, the legends of yesteryear like Gerald Tsai's Manhattan Fund -- which burned brightly for a few years in the go-go 1960s, then flamed out? Today only scattered traces of the cult of personality remain.


    Hedge funds have also been a galaxy of star managers -- larger-than-life figures such as George Soros, Michael Steinhardt and Paul Tudor Jones. Inevitably, however, signs are now mounting that hedge funds will also become more domesticated and committee-driven as their journey carries them along.

    ``The hunt for ripe investment opportunities and institutional capital has led many hedge fund managers to leave behind their single-strategy roots and branch out into multi- strategy organizations,'' reports the consulting firm Greenwich Associates in Greenwich, Connecticut.

    ``Geographic diversification is not new, but for a growing number of hedge funds this is the next step in their evolution from relatively simple vehicles into complex organizations,'' Greenwich Associates says, summarizing a survey of more than 1,200 hedge funds.

    Multi-strategy! Complex organizations! Those are phrases a bureaucrat can really sink his teeth into. And ``institutional capital?'' Why, the phrase positively reverberates with the sounds of a shift in command and control.


    The more money hedge funds get from pension funds, foundations, college endowments and the like, the more pressures they will face to measure up against index benchmarks or other ``bogeys.'' Likewise, the more questions they can expect to be asked about their, ahem, high costs.

    That's the beauty of all this. Once we notice that hedge funds are traveling a familiar track, we can look at mutual-fund history and make some confident predictions about hedge funds' future. Here are three:

    1) There will be an industry-wide scandal. This may seem a bit silly to say; blowups and scandals have been a regular part of the hedge-fund saga since its first chapters after World War II.

    What is meant by this prediction is a broad industry-wide scandal complete with multiple oustings of chief executive officers, congressional hearings, and studies by academics proving that the whole concept has gone wrong.


    2) There will be a push for indexing. This sounds even more far-fetched than No. 1; how in the world could a hedge fund be set up to track any one market index, or even a combination of market indexes? If I can't answer that question directly, well, the history of Wall Street ingenuity almost guarantees that someone will find a way.

    3) Where there is benchmarking and indexing, there will be ``closet indexing.'' The term refers to the tendency of money managers to huddle close to whatever bogey they are measured against. It's a basic survival skill.

    The reader may detect a gloomy cast in all these projections. But the pall dissipates when one looks at the big picture, which is bright indeed.

    In spite of the stumbling blocks mutual funds encountered, they have grown today to more than $9 trillion in the U.S., and almost $18 trillion worldwide. If hedge funds travel anything close to that distance in the next 15 years, breathtaking prosperity lies ahead for managers and investors alike.

    (Chet Currier is a Bloomberg News columnist. His opinions are his own.)