It may sound silly at first glance, but a piece by Nick Wingfield in the Wall Street Journal (sub. req.) prompts this question. In the article Wingfield notes the great lengths Apple goes to maintain secrecy with regard to its forthcoming products. Apple has even sued bloggers to prevent the dissemination of new product information. This behavior has angered business partners and customers alike.
This secrecy is a deliberate policy to help gin up excitement over new product launches. Why is this so important? The fact of the matter is that Apple is now more than ever a software company. With the switch to Intel chips, the contents of Apple’s Macs and even their ubiquitous iPods are built largely with off-the-shelf components. The only distinguishing characteristics of these products are the design, packaging and software.
That sounds an awful lot like hedge funds. Part of the attraction of hedge funds to some investors is that they are pursuing proprietary strategies that are not available to the wider investment world. For this investors are willing to pay enormous fees, with the typical fund now charging “2 & 20.”
Hedge funds are loathe to disclose their current positions to outsiders. Admittedly, there are good reasons for secrecy in regards to short positions. These positions can be more tenuous insofar as short squeezes and buy-ins can make them more difficult to manage. Some strategies pursued by hedge funds are truly unique, but with the existence of thousands of such funds, they can’t all be doing something all that novel.
The fact of the matter is that with enough money anyone can set up a hedge fund. An article by Roben Farzad in BusinessWeek shows that today even relatively inexperienced investors are now setting up hedge funds. In a sense, the building blocks for a hedge fund -- including data packages, trading software, and Bloomberg terminals -- are available to any fund that can pay.
And the building blocks of performance: stocks, options, futures, etc. are common and available to all investors. The success of a fund is therefore determined by how the managers of the fund are able to mix-and-match these securities into portfolios. They do this by using the aforementioned off-the-shelf tools to create superior performance. That lies in the skill (and luck) of the managers.
The hedge fund world is becoming less opaque. Jesse Eisinger in the Wall Street Journal makes the positive case for SEC registration and greater transparency for hedge funds. Institutional investors who have become the predominant investors in hedge funds also require greater transparency for the millions that they invest.
Whether this has an impact on fund returns in the long run is unclear. The fact of the matter is most hedge funds do not re-invent the wheel. A profitable hedge fund succeeds on the abilities of the fund managers to utilize off-the-shelf hardware and proprietary “software” to create novel returns.
That sounds an awful lot like Apple Computer to us.*
*This post was written on an Apple computer.