The Great Hedge Fund Bubble
November 15th, 2006 by Justin
Dreaming of one day running your own hedge fund? You may be too late to the party. As more and more managers have chased after the potential for compensation in the tens and hundreds of millions, the returns offered by funds have dwindled substantially, to the point where funds are not even able to outperform major market indexes.
According to James Altucher, a Financial Times columnist who also happens to run a hedge fund of funds, the market is simply overcrowded:
At first, talented money managers were attracted to the hedge fund world because of the high fees and the nine-figure incomes. But, as with all good things, the quality of people, the size of the incomes and the returns have all gone down.
He also points out that hearty returns since 2003 for the major indexes like the S & P 500 and the Russell 2000 have made it difficult to successfully pitch any hedge fund to a potential investor:
The worst thing to happen to Hedge funds was that the stock market went up. At first, it did not seem such a bad thing. The market went up by 20 per cent in 2003 and many Hedge funds rocketed by 30-40 per cent. The guys who went up “only” 12 per cent that year were able to claim: “No problem. We were also up 10 per cent in 2002 when the market was down 20 per cent, so pick your poison.”
But that was 2002. What have you done for me lately? This will probably be the fourth year in a row that the S&P 500 index has beaten the average hedge fund (as determined by the various hedge fund indices).
If someone has a good idea, there’s always the potential to attract investors, but in a market as crowded as the hedge fund industry currently, it seems the time is not right for those entering money management for all the wrong reasons. It reminds me of a similar time in the late 1990s, when the sexiest career on the Street was that of an investment banker. MBA hopefuls were fantasizing about cranking out spreadsheets for 80 hours a week at the time, but by the time they’d completed their advanced degrees and actually entered the workforce, investment banking was no longer as sexy as it used to be. The same fate will soon face fund managers.
