"The problem with hedge funds is that most portfolio managers are no good"

I spent much of the past decade of my life working for a hedge fund that ultimately returned money to investors. Based upon my own experience and my observations of other hedge funds in the same situation, there are two common points of failure.

i. Portfolio managers exaggerate their own abilities.

ii. Hedge funds pay them too much.

It has been standard in this industry for portfolio managers joining new funds to demand large guaranteed payments. This is partly to compensate them for deferred compensation at previous employers, and partly because they will all assure you that they are capable of generating large amounts of PnL.

💥Follow us on WhatsApp for news alerts.💥

This is almost always untrue. A tiny minority of people can consistently make money. And yet portfolio managers are so convinced of their own worth that they will only move if they are paid upfront. You pay them. They don't make the money they said they would, and then you are stuck with a huge cost - and possibly also their loss.

This is why starting a large new hedge fund from scratch is almost impossible now. The cost of finding, hiring, and then integrating high maintenance portfolio managers has become prohibitive. The industry is only viable for established funds that have hired portfolio managers slowly over a period of years. The established funds can afford to add new staff slowly. They can also afford to pay.

This is why life has been tough for many new funds. It's also why taking money from big funds like Millennium is becoming the only option. Taking a risk on a lot of new portfolio management talent is not for the faint hearted. Taking a risk on that portfolio management talent while trying to keep a plethora of outside investors happy is an impossibility. 

Casper LeGros is a pseudonym 

Follow me on X. Follow me on LinkedIn. 

Have a confidential story, tip, or comment you’d like to share? Contact: +44 7537 182250 (SMS, Whatsapp or voicemail). Telegram: @SarahButcher. Signal: sarahbutcher.22  Click here to fill in our anonymous form, or email editortips@efinancialcareers.com. 

Bear with us if you leave a comment at the bottom of this article: comments are moderated intermittently by human beings. Sometimes these humans might be asleep, or away from their desks, so it may take a while for your comment to appear. You must take sole responsibility for comments you post on this site. We will take reasonable steps to weed out anything that we consider to be offensive or inappropriate.