What happens when the alternative is no longer the alternative but the mainstream? Bad things happen. The pigs start dressing like their former human overlords and walking on two feet. Kurt Cobain blows his brains out. And hedge funds start looking and acting more and more like the mainstream mutual funds and asset managers they once sought to distinguish themselves from.
Here’s Jonathan Ford at the FT on this new conundrum as the hedge fund world sails past $2 trillion in assets:
While the industry seems loath to accept the idea that there should be any limits to its size, there are clear problems associated with scale. It becomes harder to devise distinctive strategies. Funds find it more difficult to trade in and out of markets without moving prices against themselves.
An even bigger concern is that size has turned the industry into what is known as a “loser’s game”. This is one in which victory goes not to the player with the best offensive strategy but to the one who makes the fewest mistakes – and has the lowest costs. Hedge fundery has become a loser’s game because the funds themselves are no longer the exotic and small offshoot of mainstream fund management they were in the 1990s. Increasingly, they are the market.
Although hedge fund assets account for less than 10 per cent of investment funds worldwide, they account for a far bigger proportion of all trading on UK and US stock exchanges. The industry is increasingly engaged in a zero-sum game in which one fund’s profit is another’s loss, less the costs of the transaction. Given the high fees and trading expenses incurred by hedge funds, the majority are mathematically likely to disappoint.
They sound more like index-hugging traditional funds than ever, toeing the line, being careful not to deviate from those marching on their left and right.