The Hedge Fund Bubble

There is must-read piece in the NY Times this weekend on the hedge fund “bubble”. Whether you are a bubble believer or not, the growth in assets in said category from $40-billion to $1-trillion in fifteen years is cause enough to be paying close attention.
My view: There isn’t a hedge fund bubble, per se. After all, capital is highly mobile, and if you under-perform as a hedge fund you will quickly be a fund-less fund. That said, however, it is likely true that there is a comp bubble: A lot of people are having a three-year party with too many assets, and at a 1-and-20 comp (1% management fee plus 20% of the upside) it doesn’t take all that much in terms of assets to pay yourself very well indeed — for a while.


  1. Frankly, I thought the NY Times analysis of the risks of hedge funds was quite weak. Being so highly deregulated, most hedge funds require strong internal controls, which are not often present, to ensure proper allocation of funds and reporting of returns. Also I wonder if the figure of 12.57% average returns cited by the Times was independently verified or whether it’s based on funds’ self-reporting?

  2. Oops, I accidentally clicked post before I was done writing my comment. Essentially, what I was trying to say was that the post was interesting but it neglected to really take a deep look at some of the hidden risks involved with being so highly deregulated.