Hedge Fund Success Dooming Industry to Lower Returns?

The Economist argues (correctly) in the current issue that hedge fund industry success is almost certainly leading to lower industry returns. When you have a few billion dollars extra chasing the finite list of market anomalies, transient or persistent, you aren’t going to be long before everyone is fighting over smaller scraps.

Performance in general seems to be deteriorating. In the late 1990s, says Mr St Aldwyn, no one would touch a fund that did not claim to be able to make 15% a year. Now investors seem happy with a promise of high single-digit returns.
Even this seems beyond many. In the first six months of this year, most funds were flat or slightly positive: the CSFB/Tremont investible hedge-fund index is up a touch over 1% so far this year. April and May were two of the worst months for years. Many in the industry find that disturbing, given that almost nothing nasty happened in the markets. “It’s all doomed in one way or another,” says one hedge-fund manager. From alpha to omega in a few short years