Chapter 6
The future of hedge funds
As Chapter 5 showed, the outlook for the industry might be changed significantly by the backlash after the credit crunch. But it is hard to see how the industry can be destroyed completely. Its pioneers are remarkably resourceful and inventive; they are more likely to move location than to give up.
For hedge funds are not so much an industry, or an asset class, as a structure. At the risk of being pretentious, it could almost be said that hedge funds are a state of mind. The sector’s titans have moved into more and more areas of finance, using their skills and flexibility to act as banks, insurers and private equity investors. Small funds that started off as two men with an idea and a computer model are becoming diversified giants, with billions under management and offices all over the world. The market crash of 2007–08 was a setback, cutting the industry’s assets under management, but was not a mortal blow.
Perhaps the classic example of this convergence trend is the American hedge fund firm DE Shaw. When it started DE Shaw used computer models to spot attractive opportunities in equities as a market neutral fund. It has since expanded into several different strategies, moved into long-only management, bought the toy store FAO Schwarz, set up a corporate lending subsidiary and acquired an insurance group. It is no longer just a hedge fund but a financial services conglomerate.
There are four potential types of business dancing round each other: ...
