Last week, word came down that Echo Street Capital Management was getting out of the hedge fund game. In and of itself, this is, of course, not unusual: 304 hedge funds closed their doors in the first quarter of 2020 alone. But Echo Street wasn’t having trouble raising money—it reportedly had a “waiting list of interested investors”—and its performance, while not particularly impressive this year with a 10% drop, has generally been “excellent.” Its founders aren’t retiring to play with his money in a family office; far from it: The firm will continue to run its long-only strategy and will launch a new long-focused vehicle that, frankly, sounds suspiciously like a hedge fund. There’s just one key difference: Running it won’t turn Echo Street’s managers into hollowed-out shells pining for death with each minute of the trading day.
“Why is the environment for hedge funds getting harder?” the September 9 letter said. “Managers live inside the box defined by their risk constraint. They can do whatever they want, as long as they stay inside that box…If that box includes a need to ‘smooth the ride,’ then that box gets tighter and smaller every year. As the techniques we use to smooth the ride get discovered, they no longer smooth.”
The workflow involved in finding investment ideas is “joyful,” the firm went on. “The workflow involved in smoothing the ride is increasingly a soul-sapping one.”