The hedge fund mini-crisis

Yesterday I linked to Gabriel Sherman's sprawling State of Wall Street piece in New York Magazine.  There was one particular quote about the hedge fund industry's own little mini-crisis - anonymous of course - that deserves a highlighting here as quote o' the day...

“We used to rely on the public making dumb investing decisions,” one well-known Manhattan hedge-fund manager told me. “but with the advent of the public leaving the market, it’s just hedge funds trading against hedge funds. At the end of the day, it’s a zero-sum game.” Based on these numbers—too many funds with fewer dollars chasing too few trades—many have predicted a hedge-fund shakeout, and it seems to have started. Over 1,000 funds have closed in the past year and a half.

Sherman points out that there were 600 hedge funds in 1990, ten years later there were 4000.   Now there are almost 10,000, a few thousand more than anyone really has any use for.  The barriers to entry have basically disappeared (raise a million bucks, spend a third of it on admin stuff and you're in the game).  But all of the data says that the bottom half of the industry is starving - virtually all of the flows have been going to the biggest funds out there for a few years now.

When Sherman says that the hedge fund industry is just as overbuilt as the credit and housing markets were, I completely agree.