January 25, 2007
Changing Markets, Changing Trends
In the past few years, the hedge fund industry has exploded in size and has gone from about $500 billion industry in 2003 to over $1 trillion now. The most interesting aspect about this spectacular growth is the increase in the number and types of investors who have begun putting their money into hedge funds. As a result, hedge funds, which have traditionally been short-term investors in public stocks, have undergone a sea change. They have now become players in the buyout, real estate and even venture capital market. All this growth is to sustain returns in an increasingly competitive space.
But there is also an interesting aspect to this great growth story – a stunting of risk-taking ability. Today, hedge fund managers seem more reluctant than ever to make risky investments. Of course there are a few odd ones out there, but they only serve to underline the basic nature of hedge funds today – of toeing the line. The main reason is that their clients no longer want them to deal in risky investments. So, for fear of losing these customers and more importantly, their fees, which can only be called exorbitant, hedge fund firms are now learning to play safe.
As fund managers realized that they were making a killing by raising money from pension funds, endowments, insurance companies and other institutional investors, their taste for the dangerous diminished. And the decisive factor was the 2 percent per annum management fees from large amounts of assets. With all these benefits, it didn’t take long for caution to become the new byword for hedge fund managers. However, any which way you look at it, hedge fund firms seem to be the gainers. Their strategy of caution allows their investors to repose more faith into these firms, which then translates to more business and more money.
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