This content is from: Portfolio

Hedge Funds Just Won't Die

No matter how hard people try they can’t kill the hedge fund beast.

Daniel Strachman Many say that the West was won with a stiff drink, a Colt 45, and greed-driven behavior of the Federal Government. Well, if you’ve been reading the popular press over the past few weeks, it seems as though history is repeating itself. Albeit in this case it’s in the hedge fund industry and not the settlement of the new frontier.

The popular press, which includes the Wall Street Journal, Financial Times, The New York Times and a few wire services, seem to think that the mavericks are at it again. It appears that the often-called “unregulated” and “expensive” hedge fund industry is experiencing quite a resurgence in the wake of the credit crisis, nationalization of the banks, failure of Lehman Brothers and a Congress and President that are working harder than ever to tame these liquidity providers. The truth is, no matter how hard people try they can’t kill the hedge fund beast.

A recent Reuters article, Hedge Funds Tip-Toe Toward An Uncertain Future, describes how hedge funds are too expensive, and that their usual fee structure of 2 percent of assets and 20 percent of profits is too rich for anyone’s assets. The only problem with this story is the reporter forgets that despite Washington’s help, U.S. markets still allow investors the freedom to make decisions on how much they are going to pay for the managers they choose.

The argument is simple, if investors think the fees are too high, they won’t invest. Hedge fund managers will have to lower fees and at some point, the supply and demand will catch up to the right levels. I am sick and tired of hearing about the fees. It drives me nuts. People usually pay for what they believe is quality service. If the quality is not there then the investors won’t pay the price.

As for regulation, well, that is something altogether different. Smart investors who pay attention to the rules of the industry realize that hedge funds are already regulated. Hedge funds are not simple vehicles operated by gunslingers doing whatever they want, whenever they want. Hedge funds are sophisticated investment vehicles that are used by tens of thousands of people around the world to manage trillions of dollars for pension plans, endowments, foundations, and individuals. Would so many people invest in hedge funds if they were really unregulated? Come on. Enough already!

The reason people invest in hedge funds is because they work. If they didn’t work, most investors would redeem their hedge fund shares and the industry would eventually die.

The beauty of the hedge fund industry is that it is actually an asset management business. The managers make money when the fund makes money. They don’t simply get paid on how much money they have under management. If the fund wins, then the manager and the investors profit. If the fund loses, the manager and the investors lose together. The same cannot be said about other types of funds. Putting one’s money where their mouth is goes a long way in my book. It seems the same can be said for hedge fund investors as well.

Daniel Strachman is the moderator of HedgeAnswers Conference Call Series and author of a number of books on investment strategy including Fund of Funds Investing (Wiley 2009) and The Fundamentals of Hedge Fund Management (Wiley 2007). He blogs at www.hedgeanswers.com/blog. Reach him by email at das@hedgeanswers.com.

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