Hedge Funds Suffer

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So we are told in the Telegraph.

The $2,000bn (£1,122bn) global hedge fund industry is experiencing its worst performance in 18 years as a result of the continued credit crisis and wider economic malaise.

The industry, which has until now prided itself on out-performing other money managers, has become one of the many victims of the general downturn affecting financial markets.

However, there's a couple of things here. Yes, I'm sure that there are hedge funds suffering. I'm sure that some have indeed become croppers as a result of the volatility of the markets.

We're not really long enough into the development of hedge funds though to be sure that this is why so many of them are having a bad time.

Think about how the business of allocating capital works. Someone spots a new opportunity and starts making big profits. When they start reporting those big profits some number of other people will look hungrily at such and decide to try and get a slice themselves. That they enter the market will increase competition in that sector.

OK, but at some point in time enough people will have done so that those formerly highly attractive profits will have been competed away.

Thus, at some point, a new highly profitable industry like hedge fund management will return to the boring profit levels of the rest of the economy.

The thing we don't know is whether this is what is happening now or whether it truly is the effect of the current slump. We'll know in, oooh, a couple of decades or so.
 

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