Considering all the naysayers who have long predicted the demise of hedge funds for one reason or another, one may not take seriously the latest dreary forecast from McKinsey & Co. However, the consultancy does make some points that may serve as survival tips for the future. “We expect the recent proliferation of hedge funds will stall and then reverse itself by 2010,” the report says. The bottom line: Investors are getting wise to HF managers. McKinsey cites Bridgewater Associates research which found that hedge funds that invested in five strategies couldn’t beat a synthetic passive index. And once institutional investors – the biggest source of HF flows these days – realize that, they will “be unwilling to pay for it. Instead they will switch to the true (and fewer) generators of alpha.” According to McKinsey, those relying too much on producing beta are going to run up against competition from other beta-users, such as quantitative managers, while traditional managers will increasingly look to maximize returns by exploiting leverage, just as hedgies do. “Investors will realize there is no such thing as a hedge fund asset class,” Bridgewater founder Ray Dalio told Financial News.
