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The Reformed Broker

The hedge fund mini-crisis

The hedge fund industry may be just as overbuilt as the credit and housing markets were.

By Joshua M. BrownGuest blogger / February 8, 2012

Is the hedge fund bubble about to burst? Many experts think so.

Wally Santana/AP/File

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Yesterday I linked to Gabriel Sherman's sprawling State of Wall Street piece in New York Magazine.  There was one particular quote about the hedge fund industry's own little mini-crisis - anonymous of course - that deserves a highlighting here as quote o' the day...

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Joshua has been managing money for high net worth clients, charitable foundations, corporations and retirement plans for more than a decade.

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“We used to rely on the public making dumb investing decisions,” one well-known Manhattan hedge-fund manager told me. “but with the advent of the public leaving the market, it’s just hedge funds trading against hedge funds. At the end of the day, it’s a zero-sum game.” Based on these numbers—too many funds with fewer dollars chasing too few trades—many have predicted a hedge-fund shakeout, and it seems to have started. Over 1,000 funds have closed in the past year and a half.

Sherman points out that there were 600 hedge funds in 1990, ten years later there were 4000.   Now there are almost 10,000, a few thousand more than anyone really has any use for.  The barriers to entry have basically disappeared (raise a million bucks, spend a third of it on admin stuff and you're in the game).  But all of the data says that the bottom half of the industry is starving - virtually all of the flows have been going to the biggest funds out there for a few years now.

When Sherman says that the hedge fund industry is just as overbuilt as the credit and housing markets were, I completely agree.

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