I have thought for a while that the hedge fund business model was breaking down. In fact, I turned down an offer to raise capital in a hedge fund format a few weeks ago. This summer it appears that the soft white underbelly of hedge funds is being exposed as the four legs of hedge funds are being kicked out right from under the industry:
- Leverage – Hedge funds need leverage to generate excess alpha and non-correlated returns. Leverage is being removed from the system like never before for hedge funds.
- Manipulative Short Selling – Short selling is a good thing. Manipulative short selling is illegal and against the interest of shareholders. That is now going to be enforced and put to an end. Next we will have the reinstatement of the up-tick rule. It worked for 70 years but failed us in the last year.
- Performance Fees – Many funds are closing up because the managers won’t earn performance fees. This resulted in massive liquidations which are still continuing.
- Lack of Transparency – The SEC took the first step in requiring hedge funds to report short positions over certain limits. Mutual Funds have to file reports with the SEC and provide shareholders with a quarterly report which is part of the SEC filing. The wall of transparency will be brought down.
So what will happen? Eventually we will see assets flow back to more traditional forms of investment – managed accounts, mutual funds and self directed investments.
Disclosure: None
