Hurrah! Hurrah! Success!

Net investment in hedge funds has fallen to almost zero this year as poor returns and the high-profile implosion of funds such as the $2bn (£1bn) Peloton fund have driven away investors.

Data from US-based institution Hedge Fund Research (HFR) shows the capital managed by hedge funds in the three months of this year rose by less than 1pc.
...
Performance was poor across almost all investment strategies.

This isn't a bad thing at all, it's a matter for celebration: markets work, this liberal captialism shtick works exactly as advertised on the tin.

Start from the beginning, when Soros and Templeton first stalked the lands. They really were hedge funds, in that they spotted inefficiencies and exploited them. That is, they were arbitrage funds, not people taking a bet on markets moving one way or the other, but people making use of and in the process closing gaps in the markets. At it's most simple this might be buying a share in New York and selling it in London where the price is 5 cents different. Enough people do that and of course the price isn't different any more.

Good, our markets are now more efficient (The Law of One Price fits in nicely here).

Other financial market types spot that Templeton and Soros have been upgrading their yachts, vintages and cigar sizes and see that they've been making excess profits (defined as profits above the general profit level, adjusted for risk) and decide that they'd like a piece of that too so they pile in. As do, some years later, pensions funds and next door's grandmother.

At some point there's enough capital competing for these arbitrage opportunities that there are in fact no excess profits to be had. They've been competed away: yes, markets often overshoot, so that in these final stages there's losses, not just an absence of profits, but that's fine. There's no system other than a free market one which would have identified, exploited and thus expunged those inefficiencies.

The end point is thus reached: profits from financial arbitrage are no longer above the risk adjusted level and we have our markets as efficient as they can be at our current level of knowledge/technology. Thus we have our proof that these markets work: resources moving to their highest value occupation is a synonym for wealth creation. Indeed, it's the very definition, that when a resource moves from a low to a higher value use, wealth is created. Capital chasing higher returns and getting them (returns being the price for capital) makes the whole economy richer.

Finally, now that we've reached this desirable plateau with the hedge funds the game is on to see where the next source of excess returns is so that we can spend a decade or two competing that away. Some bright spark has already found it would be my assumption, but the difficulty of working out which one is what makes it all so interesting.

Given my quite startling inability as an investment guru I wouldn't take this all that seriously, but I offer as sectors of interest the following. Alternative energy: yes, I'm certain that someone is going to design and manufacture a method competitive with traditional sources. Space: it's going to get a lot more interesting than just sub-orbital tourism flights....someone is going to get into orbit cheaply and once you're in orbit, you're not just half-way to the Moon, you're halfway to anywhere. Finally, one or other African country is going to get a decent government and start to grow like the Far Eastern Tigers.

On that last, well, I damn well hope so, anyway.