Wednesday, September 23, 2009

The Hedge Fund Business Continues Its Implosion

Needless to say, were the finance industry not backstopped by trillions of taxpayer money, there probably wouldn't be a hedge fund business any more. Something we said would happen before this crisis developed. My favorite, the "fund of funds" business isn't doing so well either. While Wall Street was feeding the world its favorite flavor of bullshit, we wrote that the fund of funds business was ridiculous and had just about no chance of being sustainable.

Almost all hedge funds are substantially underperforming the markets today. Another dynamic we wrote would happen. The fee squeeze ain't over even though many hedge funds are trying to withstand the pressure for fee changes. If hedge funds don't implode due to their own foolishness, fee structure changes will impact their profitability and ability to invest in future capabilities thus contributing to a self-fulfilling dynamic of even further underperformance for many.

Here's the new deal I see happening. Some of the savants who ran hedge funds are now offering workshops on how to open a hedge fund. That's just too rich. One has proven no ability to manage risk, understand little about financial markets and know nothing about economics yet they are going to impart this vital wisdom on unsuspecting prey err ... clients. Of course, all for the benefit of the common good. The hedge fund business should have been regulated from day one.

There are surely many bright and honest folk working in the hedge fund industry just as is the case with Wall Street. But most serve a system they do not understand. Hence most will fail. The vast majority of these people should be plying their trade in the underlying economy for productive use. And this is exactly what we said would happen four years ago when we wrote of what would happen to the people employed in the financial bubble when it collapsed. Some firms will surely survive but in what form remains to be seen. The more complex or transient the strategy, the more likely they are to fail in my estimation. (strategies such as the very popular momentum or long-short approach to gambling .... err ... investing are wildly successful at times but are transient as a point of reference.) Firms employing complex or transient strategies rely too heavily on curve-fitted models or mathematical gibberish or unfair advantage through regulatory loopholes which are likely to be closed over time as the monster on Wall Street continues to cause future crises.

posted by TimingLogic at 9:08 AM