Betting on the Future
By Richard Beales
From investment choice of the rich and informed to fixture on the
investing scene: What’s ahead for the fast-growing hedge fund industry?
Not long ago, the idea that hedge funds were “generally run for rich
people in Geneva, Switzerland, by rich people in Greenwich, Connecticut” captured the industry neatly. The funds attracted little attention, and the relatively few managers operated under the radar. Investors were wealthy individuals and families, themselves eager for privacy.
Just over three years ago Clifford Asness, W’88, co-founder of
giant hedge fund AQR Capital Management, LLC and the man
who coined the Geneva-Greenwich quip, was still wondering
whether hedge funds could, in part at least, be a fad. “They are
generally perceived to be the investment of choice of the rich and
the informed, and they are more interesting and fun to discuss
than your Vanguard index fund,” he wrote in the first of a pair of
2004 papers discussing the role of hedge funds in investing.
Now, though, few would say hedge funds are anything but
a fixture on the investing scene. The industry has doubled
in size in the few short years since Asness wrote his papers.
By last fall, the private investment vehicles managed more
than $1.8 trillion of investors’ money globally, up from less
than $40 billion in 1990, according to Chicago-based Hedge
Fund Research, Inc. Meanwhile, the number of funds has risen
from about 500 in 1990 to 7,500. Asness’s Greenwich-
based fund group is one of the biggest, managing some $35
billion as of early 2007.
And hedge funds and their “alternative investment”
cousins, private equity funds, are increasingly commonplace
investment choices, not only for wealthy individuals
and families but also for university endowments and pension
plans, thus following in the footsteps of early investors,
some of whom have achieved spectacular returns on alternative
investments. Aside from returns, many hedge fund investments
aren’t too closely related to the ups and downs of
traditional markets, something especially attractive to investors
still smarting from losses on stocks in 2000-2002.
“There’s been tremendous growth,” says Richard Marston,
Wharton’s James R.F. Guy Professor of Finance. “I don’t see it
slowing down.”
This headlong growth may prove to be an Achilles’ heel for
some hedge funds. Outsized returns could be harder to come
by in the future, with ever increasing amounts of hedge fund
money crowding into similar trades. And even as fund groups
get bigger and become more institution-like, some may find it
tough to stay nimble.
At the same time, lawmakers and the media are increasingly
taking notice. The chance that big market-wide dangers—known as “systemic” risks—could originate with hedge
funds is one reason regulators around the world are scrutinizing
the industry. More prosaically, while hedge funds’ high
fees—and stories of their billionaire founders—attract talent
to the industry, they also catch the attention of politicians
and the press. Hedge fund managers aren’t used to dealing
with the glare of publicity, in fact quite the reverse.
Last summer’s turmoil in financial markets may yet prove
to have been something of a watershed. While few are blaming
hedge funds directly for causing the volatility, their activities
contributed to it at times, experts agree. In any event, the
shock rattled regulators, investors and the funds themselves,
perhaps catalyzing shifts in the industry.
- Hedge Funds 101
- Investor be Wary
- Scale versus Agility
- Tougher Talk about Regulation?
- An Alluring Career Option
- A Bumpy Road Ahead
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