Remember, back in the day, when hedge funds were where investors went when they wanted a thrill? Where there was something exhilarating about locking up your money for a matter of years with a manger who would make insanely risky bets? Where it felt dangerous but that was part of the fun- thinking about the fact that at any moment, you could be getting a letter informing you that the fund was shutting down, and for every dollar you invested, you'd be getting 9 cents back? Where you gladly turned your money over to a guy wearing only fleece, who would slap you on the mouth if you dared inquire as to how things were looking but part of you liked it because it only stung for a few seconds and also because one year he handed you 69.8% and 71.8%? Where you were at times seriously fearful for what was being done to your money and some months you'd lose big and other times you'd win and in fact you never knew what to expect but that's what made it so exciting? So worth it, for the tingling feeling it gave you, down in your plums? For the chance to feel alive again? Yeah. You'd better start looking for that sensation elsewhere.
Hedge funds may finally be losing their sex appeal. A small but growing number of investors believe these once-free spirited portfolios, viewed as the cutting edge of finance for most of the past decade, have become too conservative and boring.
Many rich people were attracted to hedge funds by stories of George Soros's $1 billion profit from his speculative attack on the Bank of England or John Paulson's $3.7 billion earnings in 2007 betting on the subprime meltdown. But institutions -- who now account for over half of all hedge fund assets -- often prefer lower-risk funds, targeting single-digit or low double-digit gains. "Steady, low double-digit returns are typically much better at attracting institutional investors than higher but more erratic performance," said Odi Lahav, vice president at Moody's alternative investment group.
"There is a tendency for managers to run lower levels of risk in their portfolios than they used to. The risk is that some portfolios are no longer running with the spice or edge they used to," he said.
"There is certainly a pocket of family offices and high net worth individuals who are looking for more interesting returns, but from an asset-weighted standpoint, that is not where the industry is trending," said Dan McNicholas, head of Asia financing sales at Merrill Lynch. The changes could eventually create a two-speed industry, with many larger firms offering more conservative returns, while the hunt by other investors for higher returns could drive part of the industry back to its roots.
We know of at least one guy doing his part. For anyone looking to feel alive again- join him.
Hedge Funds Lose Sex Appeal [Reuters]