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     future

This page considers speculation about the future of the hedge fund industry.

Jesse Eisinger commented in late 2008 that

The hedge fund mystique died with the crash of 2008. Youthful traders and big shots from investment banks won’t soon be given billions to invest based on their résumés. Mystery and opacity will be a negative, not cause for reward. Regulators, one hopes, are unlikely to again ignore an industry that, under their noses, grabbed at its peak nearly $2 trillion to manage.

As many as half the funds that existed earlier this year, when the industry topped out at 10,000 funds in business, could fail or be wound up in a year’s time, industry watchers estimate. Assets under management at hedge funds are falling as investors rush to pull money out of good funds and bad. In September, investors took out an estimated $41 billion from the sector, the largest monthly outflow of money since experts began tracking numbers.

He went on to conclude that

the hedge fund business itself will not look anything like it did during its heyday. Washington clearly intends to declaw the industry. That will probably mean, among other things, that hedge funds (and private equity firms) will finally lose the argument about taxation. No longer will their income be taxed as capital gains but as regular income. The additional tax dodge of keeping money offshore to defer taxes for years should, and probably will, be closed.

After having looked obviously unsustainable for years, the egregious hedge fund fees will come down. The model of charging a 2 percent management fee while the fund manager takes a fifth (and sometimes more) of the profit is finally under sustained attack. Not long ago, the trend was for hedge funds to become bigger. They morphed into traditional money managers and began to manage tens of billions of dollars. Most hedge fund watchers think the biggest fund managers will only get bigger. But that’s hard to see. Endowments and pension funds are going to be chastened. The remaining hedge fund investors will demand focus from their managers. Small will become beautiful again. The survivors will be nimble and run less money. The esoteric strategies based on levering up small arbitrage opportunities will become less popular if regulators do their job and crack down on excessive borrowing.

Perhaps ironically, many hedge fund managers are anticipating great times—if they survive. “This will be the best moneymaking environment of my career,” the hedge fund veteran tells me. “Tons of competition are out, and even the capital that will survive is underlevered. And we are starting with disparities and opportunities you’ve never seen.”

For the survivors, it’s going to be a wonderful time. But there won’t be many of them

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