Conference Presentation, Panel
The Hedge-Fund Shakeout
Milken InstituteEric Schatzker, Eddie Fishman, Jeremy Shipman, Gerald Beeson, John McCormick, Ilana Weinstein
- The industry is predicted to undergo further consolidation over the next decade, with assets growing to levels "over 10 years higher" while alpha expectations shift toward "lower percentage" but "larger dollar" returns.
- A "Red Queen race" is anticipated where the standard for competing rises continuously, driven by a "never-ending arms race" in technology, big data, and machine learning that favors firms with significant scale.
- Market conditions have shifted toward a zero-sum dynamic with "little structural alpha" available due to market maturation, accelerated price discovery (information priced in "two days" vs. "three to six months"), and a shrinking pool of public stocks falling from "8,000" to "3,500".
- Firms failing to invest in infrastructure and human capital "over the last five years" risk losing top talent to competitors or multi-manager platforms, especially as institutional investors increasingly "concentrate their bets" on manager selection rather than asset allocation.
- Regulatory changes post-financial crisis, specifically the "Dodd-Frank" Act and "Volcker Rule," have constrained big US banks, resulting in a "30% reduction" in their participation in fixed income, currencies, commodities, and credit.
- Scale is expected to correlate positively with performance and alpha generation, creating a "flywheel" that allows large firms to invest in diversified technology and talent, whereas strategies generating "$300 million" of alpha may decay when applied to funds larger than "$10 billion".
- Successful firms will increasingly adopt a hybrid approach combining fundamental human judgment with quantitative tools and predictive analytics to create a "greatest information machine" capable of solving problems humans cannot.
- Founder-led compensation structures face pressure to evolve, requiring founders to provide direct pay or "reach into his own pocket" to retain talent, while offering "1% decision with autonomy" or "$200 million" to manage after "four or five or six years" of vetting.
- Fee structures are projected to be "lower" in the next 10 years, accompanied by "more creativity and alignment" as investors demand greater clarity on what they are paying for and disaggregate returns.
- The term "hedge fund" may become "overly broad" or meaningless in 10 years, as the industry diversifies into "1,500 mortgage servicing operations" and strategies ranging from quantitative to global macro, with the "bar" for investor due diligence rising annually.