Last week the popular press was once again littered with stories on the demise of the hedge fund industry. Reports from a number of well-respected observers have put fund closures and investor redemptions at near-record levels. Some believe that over $70 billion of capital was redeemed from funds in 2016, with the number of fund closures pegged at north of a thousand.
Fear not – all is not lost. The industry is still going to survive and I expect it will thrive in the months ahead. And the years, too.
There’s plenty of life left in both new and existing managers and smart money will find its way to these funds. It appears to me — through completely unscientific research — that both managers and investors are getting smarter, respectively, about how they run their business and how they invest their money. And while it pains me to say it, shrinkage may not be all that bad. The reality is that investors should not be investing with managers who are not able to deliver alpha, and managers who can’t deliver alpha should not be in business.
I don’t believe that the market is oversaturated, as someone said last week. Oversaturation implies that there are so many good managers out there that all can’t attract assets. Nope. What is happening is that good money is finding good managers.
I don’t believe that redemptions and fund closures are a supply-and-demand issue either, but that investors simply are making better decisions: When they don’t like what they see or don’t like the numbers, they’re choosing either not to allocate or to redeem. I’m not sure that all this new or all that exciting, as the wire services gush, but rather just a fact.
I would like to believe that the industry will experience growth, but I don’t have a crystal ball. What I do know is that a number of the lawyers and consultants I speak to on a regular basis seem to be getting busier. That is a good sign. For investors, it comes down to one simple thing: Do you believe that the manager is going to be able to deliver returns you expect through the strategy that they employ? If the answer is yes, invest. If no, find someone else.
Things that drive me crazy
I am sick and tired of people who don’t have a real message on their voicemails and simply a voice that says their number. Nothing annoys me more than when I call and all I get is “You have reached number 123-4567.” I don’t understand why people can’t have a personal message anymore. In the age of the iPhone nobody knows what number they are calling other than Dan Strachman, work, home or cell. That’s why answering with a number and not a message is simply foolish and just plain annoying.