In this issue of AR, we ask a provocative question: “Are hedge funds good for you?” After the insider-trading conviction of Raj Rajaratnam, and the investigations and indictments of numerous others, it seemed time to take stock. Do hedge funds serve a useful purpose in the investing landscape? Do they provide liquidity or merely sop it up? Is their ability to short stocks or their willingness to go along with the bullish crowd the bigger problem? Do activists do any good? Are hedge funds a danger to the system?
There may be no cut-and-dried answers to these questions, but the exploration of the issue definitely turned up some of the lesser-understood and reported-on positives of the hedge fund industry. One can only hope that investors will start to take note.
Hope is the key. The hedge fund comeback remains as bogged down as the global economic recovery. As our semiannual new-funds survey indicates, for the first half of 2011, launches garnered $10.3 billion, a little less than the $10.9 billion startups collected during the same time period last year. The good news: There was at least one blockbuster launch—Duquesne Capital Management’s $5 billion spinout of Point State Capital.
These remain treacherous times for hedge funds. With QE2 behind us and Greece tottering, it’s hard to judge the temperature of the markets. Yet there are optimists among us. Pershing Capital’s Bill Ackman is talking to investors about a fund IPO this year. A word of warning: In the past such IPOs have served as market-top indicators. Another such indicator might be that FrontPoint Partners’ Steve Eisman, the well-regarded bear on financial stocks and for-profit education, is leaving to start his own fund. Both moves are big news—and reported first by AR on our website last month.
Investors might want to make a wager on one or the other—or hedge their bets by signing up with both.
