In a similar way that the dot-com boom could serve as a snapshot for the 1990s, the last decade could easily be defined as a period where many Wall Street insiders daringly quit their jobs in exchange for presumptive hedge fund glory, The Wall Street Journal reports.
Naturally, the hedge fund industry flourished, and in only a matter of years the number of funds skyrocketed from around a few hundred to nearly 8,000.Yet, somewhere in the middle of all the hysteria of this contemporary gold rush, two things became increasingly clear: success is never guaranteed, and much to the delight of Darwinonly the strong, and the big, survive.
According to Hedge Fund Research Inc, 2007 was marked by the smallest increase in new funds than in any other point in the past six years.In fact, out of the 1,152 funds launched last year, new businesses expanded by only 589 funds in light of several mergers and shut downs.
While new funds struggle to break into the game, veterans faced their own mixed results.Hedge funds giants like Och-Ziff Capital Management, D.E. Shaw & Co. and Paulson & Co. established dominance in the world of hedge funds much like Vanguard and Fidelity have made their mark on mutual funds, yet some smaller firms were not nearly as fortunate.
Take 20-year veteran David McCarthy for example.McCarthy decided to shut down his hedge fund despite strong results in 2007 after some investors indicated that his $300 million firm was just too small.
The bar has gone up, its tough to manage $250 million to $500 million, McCarthy said.
In the midst of ever-challenging market, the gap between the number hedge fund winners and losers is increasing.Last year the top 10% of funds posted average gains of 62% whereas the bottom 10% had losses of 14%.On a more positive note, the average fund is still ahead of the 3.8% decline of the S&P 500 during the same period according to Hedge Fund Research.
Even though some hedge funds are having an identity crisis of sorts, the almost $2 trillion hedge fund industry is still holding up fairly well.It comes down to the inescapable reality that success is never guaranteed, which is something that 39-year-old Bertrand des Pallieres learned firsthand after he leftDeutsche Bank to start a London-based hedge fund.
We thought a billion dollars was a good figure to count on, des Pallieres noted.He thought wrong.
After personally spending close to $1 million per month just to keep the firm running, his investors decided to back out in January without warning.
While most would take this as horrible news, des Pallieres did not panic. Instead, he packed his bags and went on a weeks vacation to Maldives with his girlfriend.Upon his return to London, des Pallieres informed his employees that he would no longer be funding the business.
Its not that bad, said des Pallieres, and perhaps hes right.
After all, he still plans to hang on to the keys of his Maserati Cambiocorsa, a vehicle that was once impounded for three months according to a story published last August in the The Independent.Ironically, Mr. Des Pallieres said that he was too busy trying to set up his new business to retrieve his Maserati.
In the risky world of hedge fund dreamers, it seems to be the case that most people sink, and even fewer swim. Des Pallieres might be stuck driving for the meantime, that is if he can obey the rules set forth by Londons parking enforcement officers.