Hedge Funds: Skyrocketing or Plummeting?

Last week there was an interesting exchange regarding the growth (or decline) of the hedge fund industry, following news that hedge funds have hit a new record $2.13 trillion in assets under management (AUM). It all started when the Wall Street Journal ran an article citing a Citigroup survey saying that hedge fund assets will double (or triple? The article is a bit unclear) over the next 5 years.  This new money is expected to flow, in part, from investors fleeing the underperformance of traditional sources of investment such as mutual funds.

We’ve heard (and written) about the death of the mutual fund quite a few times, but still… $2-3 trillion in the next 5 years? If that strikes you as a bit optimistic, you aren’t alone – Barry Ritholtz over at The Big Picture was quick to respond with his own take. He argued that the best times for hedge funds are in the past, and most of the investors he knows are fed up with hedge funds’ illiquidity, lack of transparency, and the lackluster returns of the last few years. He pointed to the death of fund of funds and growing consolidation in the industry as evidence that the industry is on the precipice of decline, not preparing for a huge growth spurt.

The next turn in the conversation came from Felix Salmon, who agreed with Ritholtz on some fronts, while disagreeing on others. While Barry’s point is that individual investors and family offices are fed up with hedge funds, Felix points out that institutional investors in hedge funds have been on the rise. If you take a look at the report itself, you’ll see that the authors count institutional money as the source that this increase in assets is expected to come from.

But the one point that Felix and Barry seem to agree on is that the hedge fund industry is consolidating, and we’re likely to see fewer, larger hedge funds controlling the asset pool.

If only it was that simple… A short time later, Josh Brown over at Reformed Broker brought this nugget to our attention: the hedge fund churn is back on the rise, with more funds shutting down – and new ones opening in their place – during the first quarter of 2012 than in any of the last few years.

So to summarize: investors are fleeing hedge funds, investors are flocking to hedge funds, the industry is consolidating, and hundreds of new funds just opened. We’re glad that’s settled.


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