The kudzu-like proliferation of hedge funds earlier this decade brought a spike in concerns that the sector's overcrowding all but eliminated alpha-earning opportunities that could justify the funds' high fees. Now that conditions have flipped around, a shrinking fund industry will spur both return opportunities for investors and career opportunities for hedge fund professionals, according to a report released last week.
First, a caveat: The report's author, Eric Attias of newly formed fund of funds firm Nexar Capital Group, is obviously talking his own book. Still, his prediction is worth a look.
"We are now welcoming a new era that should be very conducive to hedge fund investing," the report begins. The primary reason seems to be that there are fewer funds around - 21 percent of hedge funds and funds of funds operating at the end of 2007 have been liquidated, according to Hedge Fund Research - leaving survivors better positioned to exploit market inefficiencies and deliver superior risk-adjusted returns. What's more, fees are coming down and investors are winning better treatment in terms of transparency and other fund industry practices that slipped during the boom. Heightened regulation of funds also will work in investors' favor, Nexar says.
What about careers? The industry's consolidation "has concentrated talented managers into fewer firms," says the New York Times DealBook in its summary of the Nexar report. "As firms continue to liquidate, the industry should be well-positioned to redistribute and integrate its most talented professionals." The report mentions Millenium, Citadel, Brevan Howard and SAC as among prominent funds that reportedly hired new talent in 2009.
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