How Barclay’s Reshaped the Hedge Fund Business

Great, great Bloomberg piece out describing how Barclay’s Global Investors (BGI) has used Ph.D.s and technology to reshape the hedge fund business.

BGI is one of the most powerful forces in money management today. It’s a den of finance Ph.D.s, mathematicians and other disciples of quantitative analysis, or quants. BGI quants design investing strategies for thousands of stocks, bonds and currencies and then use computers to pick which ones to buy and sell.

BGI manages almost $1.7 trillion in assets and has a finger in 65 of the world’s 100 largest pension plans. Its iShares exchange-traded funds, which are low-cost index trackers that can be traded like stocks, have made the firm the Wal-Mart of the $383 billion ETF world. Lately, BGI’s size and reach have helped fan speculation that its parent, London-based Barclays Plc, is headed for a megamerger with a big U.S. bank. Barclays is the third-largest U.K. bank by assets.

Blake Grossman, the Stanford University-educated economist who runs BGI, has used his quants to quietly transform a firm built on index investing into one of the world’s largest hedge fund managers.

Read the whole thing. Really.


  1. This is an interesting article but it states that, “When you short a stock, which involves borrowing shares and then selling them, the potential losses are, in theory, bottomless.” This is true for retail investors but not hedge funds who can borrow more stock without limit to sell short and thus cap the price per share. BGI itself has access to hundreds of billions of dollars in stock because it makes the stock underlying the ETF’s available to borrowers. There is a fee to borrow stock (called a negative rebate) but this fee is not “bottomless.”

  2. alpha24seven says:

    Actually, The notion that the potential loss while shorting a stock is “bottomless” is actually nonsense. For one thing, when shorting a stock you can never lose more than what you have in your account. The term bottomless and the common implications would have you believe that the potential for loss is infinite which is completely untrue. Another thing is the real losses investors take every day because a stock they are long “will just come back”. The reality is that far more investors (including institutional investors) simply hang on to a bad long, longer than they should and take unnecessary losses. Far more margin calls and account blow-ups are because investors won’t cut lose a long position as opposed to investors that are short and refuse to cover.
    The presentation of “infinite loss” has always been a futile scare tactic perpetuated by the long only crowd.

  3. I read the entire article but didn’t find anything that would indicate the article was “important”. Seemed like the typical Bloomberg profile. What did I miss?

  4. noone: the important part was that these hedge funds are either less successful or having temporary moments of being slightly more successful than index funds, but with vastly higher managment fees and far more risk.
    Oh, and pension funds are grabbing these things like crazy because they have unfunded liabilities, but I don’t see how this strategy will solve that.
    Seriously, Paul: am I learning the expected lesson? Because the impression I got, after subtracting the cheerful tone, was that a lot of extremely smart people were using a lot of extremely sophisticated computer-driven analysis to create funds which were unresponsive, had high fees, and mostly underperformed the market, except for that one that’s been running 3 points higher than the S&P in its first year.
    A consistent 3-point advantage would be huge news, but one FY does not a Buffett make.
    That said, if short positions are routinely underplayed in the market (and some clever people seem to think this is so), it may be an advantage to play them heavily in a portfolio. Also, if the first two commenters are accurate about the advantages BGI has in short coverage (and it may be true, but when I hear “borrow more stock without limit” I think of the roulette technique where after every losing bet, the bettor doubles up…), perhaps there is gold in them thar shorts.
    But if it was my money? Low-fee Index funds.