Have Hedge Funds Grown Too Large?

Leo Kolivakis's picture

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Leo Kolivakis's picture


An industry expert shared these comments with me, which I share with my readers:

I agree with you, favoring liquid strategies vs illiquid ones. The biggest problem with illiquidity is that investors were not getting paid for providing liquidity to others. At the very least, if you take the risk of doing it, get compensated for it!!!


In terms of who can use managed account platforms (MAP), I believe it applies to all kinds of investors, not only to those with little or no experience. What we’re seeing this year is the very large and very experienced going to MAP in order to better control their risks. The “cash on steroids” approach.


Finally, the size debate is a hot topic, with arguments going both ways. My take is the following: returns will necessarily diminish with the size of the HF. You can have a Bridgewater one year, but that’s just one exception rather than the norm. On the other hand, I do not agree that they are getting too big for the financial system. Goldman is the largest HF, they have permanent capital (or I should say they act like if they have permanent capital…) and their size dwarfs any hedge fund. I would be much more worried about Goldman, vs the others who manage their liquidity risk much more carefully now.

I thank him for sharing his insights with me and letting me post them here. he also sent me this Infovest21 article, which discusses how large US pension funds are increasing direct allocations to hedge funds and some are using fund of funds as subadvisors to facilitate knowledge transfer so the pension may eventually take on the internal management of the hedge fund program.

Gene Parmesan's picture

I'm not shocked to see public pension plans allocate aggressively into alternatives, which include hedge funds, private equity funds, real estate funds and infrastructure funds. Why are they doing this?


They're doing this because they can. When you have a nation of taxpayers backstopping your reckless ideas you have nothing to lose, so why not go for it?

falak pema's picture

They are the image of today's financial markets gone mad, mega brutal coliseum, where its thumbs up and thumbs down time at the drop of a hat, where they've taken over from Caesar, now wielding power in surrogate  Caesar's place; they are the deus-ex machina of the new NWO race. No overt responsibility, no accountability, total opacity. Driving HFT Ferraris, parked in dark pools, funded by plutocratic fools, leveraged on thin money made available instantly in zero interest 'carry trades' by Central banks, owned by their TBTF loan sharks who run the money world. The happy few, kings of the global world. Wolves in sheep's clothing talking about the need to globalise to bring wealth and progress to all and sundry...but in reality, sheering the sheeple who flock to the global arena like corralled herds going to the slaughter house. Brave new world. One day it will all implode as thin air cannot let you levitate for ever. T-REXs tend to eat each other up when there are no more sheeple to shear. Let the dinosaurs go cannibal...they will dig their own graves as their sand castles crumble under people's rage.

freedmon's picture

It amazes me how the MSM ignores the fact that Hedge funds are always engaged in zero-sum transactions. So if they have made 30% or 40% returns over a year, that money came from someone else's pocket. These hedge funds haven't "made" a dollar. They've just moved more into their own accounts.

In fact, since they outperform pension funds, odds are some of it came from pension funds. The financial media reports all profits as if they were the same, they're clueless.

Kimo's picture

Have Hedge Funds Grown Too Large?

Yes.  But the credit collapse will fix it.

KickIce's picture

Stop QE, we'll find out where we all stand very quickly.

UP4Liberty's picture

They should be called pension fund "manglers".

rapier's picture

Not just hedge funds, the amount of money seeking a return on investment is absurdly inflated and a driver of many of the problems so many of the critics of the status quo decry.  Hedge funds are the poster children of speculation posing as investment.  Money that has been accumulated by the already too rich and taken right out of the people economy and kept in the financial economy. Where it fights with too much other money for an ROI which is now contigent upon printing.

I have more resect for almost anyone who works for a buck over any of the thousans of pricks who claim to be working at hedge funds. 

web bot's picture

<paging Mr. akak...>

chump666's picture

Hedge funds are cool...It's investment banks that are brain dead

TruthInSunshine's picture

You should do an expose on pension fund managers, Leo.

I know a gent who runs money for a few municipalities and, wow, talk about following the herd, bison-like brain following the other hooves.

I suppose this is why many people have seen their pensions devastated thrice in 12 years; incompetent, groupthink, lazy ass and dumb pension fund managers.

Leo Kolivakis's picture

"You should do an expose on pension fund managers, Leo."

That might be my next project, writing a book that will expose the good, the bad and the downright ugly in the pension industry! It's going to make a lot of people nervous...

Milton Waddams's picture

The gentleman you know is precisely the demographic networks like CNBC and the like, out of necessity, have decided to serve. The laziest people most susceptible to groupthink who run other people's money. To the sharp cats on Wall Street and elsewhere it is like shooting fish in a barrel.


ebworthen's picture

Q.  "Are hedge funds too big?" 

A.  "Yes"

Everyone is trapped in the markets.  Most everyone sits in a suburban prison without arable land, water, livestock, gold, or skills to survive three miles outside of a grocery store.

So...where does the money go?  Markets. 

Who makes off with the money?  Hedge funds, central banks, politicians.

Who can steal what money is left?  See above.


Popo's picture

"Trapped" in suburbia?  Only the dumbass debt-slaves who purchased real estate are trapped.

The debt business is the largest, most parasitic industry in the world.  'They' want you to invest in real estate because it is typically the purchase that represents the most amount of debt (or 'profit' from their perspective) that an individual can take on.  They fool the public with the absurd, and dangerous notion that real estate is a safe investment.  

Debt is imprisonment.

Real estate is the door to the prison.   Once you step inside you lose your freedom, your mobility and your flexibility.  And worse, you expose yourself to some of the most predatory taxation there is -- from which there is no escape if you cannot unload your sh*t-box.   

If you're trapped, you're the one who trapped yourself.

...and if you're giving money to Hedge funds... stop.

Personally, I loathe the banker class.  They are parasites -- nothing more.   But I do approve of hedge funds who just may represent the last independent short-interest in a market dominated by perma-bullish megabanks.

It just may be the hedge funds that put an end to this travesty of a free market.  I hope they go short to the hilt at the exact moment that is most painful for the big boys.

Yes, hedge funds are populated with dicks.  But in the immortal words of Team America:   "Yeah, they're dicks.  But dicks f*ck assh*les."


ebworthen's picture


The problem is that people are tied to place.

Men are tied to Women, and Women are tied to place and family and friends.

Women have the power and they demand a comfortable nest near relatives and friends.  Try being mobile in the life-band of 25-65 and not be riding the rails.

I hear you, and am ready to break free, but I have kids to care for - that's a 20 year committment minimum if you are going to be physically present.

"Got you by the Balls" by AC/DC comes to mind - married or not.

Long mobility, independence, PM's, and putting the dicks where they belong.


falak pema's picture

where do they belong? I envy anybody with two guns to his holsters. 

Eternal Student's picture

The Federal Reserve has been amusingly called the worlds' largest hedge fund.

So I'd change the above answer to combine (central banks and hedge funds) + politicians.

ebworthen's picture

I agree with you, but the majority cannot remove "Federal" from "Bank" and "Fund".

Some cannot break down the tripartite barrier of "Government" and "Bank" and "Individual Speculation" to see that they are all one in the same.

It makes it harder to believe in anything, which is to say, nothing.

Yes, the Federal Reserve, the world's largest hedge fund, founded in the same year as the income tax and a year before the first War to end all Wars (WWI).  There is a reason they called them "doughboys".


AN0NYM0US's picture

No matter who was sitting across the table from me, I never shied away from asking tough questions on their organization, operations, investment process and risk management.


Did you ever ask them about their  lifestyles?  Jets as taxis, homes as hotel rooms etc. or their value added in comparison say to the  three-card monte hustlers? How about their  ethics in comparison to the Akazu?