the life cycle of hedge funds

hermit_trader · Sep 1, 2003

I read an articles said that most hedge funds won't last for more than 10 years. Many of them actually had a good start that attract more investors to put money into them but then burst. Is this a typical life cycle of hedge funds?

I also heard a conspiracy theory that some managers actually steal the money. Is it possible? Could the guys at LTCM took the money but said they lost them in trading?

alfonso · Sep 1, 2003

Quote from hermit_trader:

I read an articles said that most hedge funds won't last for more than 10 years. Many of them actually had a good start that attract more investors to put money into them but then burst. Is this a typical life cycle of hedge funds?

That's what I think.

To all those who disagree, quick, off the top of your head, tell me all the funds you know of who've been around for longer than 10 years?

swoop[TR] · Sep 1, 2003

SAC, Pequot, Quantum, Caxton, Tiger.

omcate · Sep 1, 2003

Quote from hermit_trader:

I read an articles said that most hedge funds won't last for more than 10 years. Many of them actually had a good start that attract more investors to put money into them but then bust. Is this a typical life cycle of hedge funds?

Look at LTCM, D. E. Shaw, Tiger Fund, Quantum Fund etc. All of them have been very successful for a long time. All of them suffered huge losses between August 1998 and August 2001.

When someone has been successful for many years, his ego will probably be bigger than the solar system. He'll think that he is invincible, and behaves like a God. There is only one way to do things --- HIS way. This is true for people at Wall Street or Academia. Unfortunately, the market is extremely creative and good at humbling mortals, and faked gods.

Scientist · Sep 1, 2003

Quote from omcate:

When someone has been successful for many years, his ego will probably be bigger than the solar system. He'll think that he is invincible, and behaves like a God. There is only one way to do things --- HIS way. This is true for people at Wall Street or Academia. Unfortunately, the market is extremely creative and good at humbling mortals, and faked gods.

Something in my head says "Niederhoffer".

~Scientist

Free Thinker · Sep 1, 2003

Quote from hermit_trader:

I read an articles said that most hedge funds won't last for more than 10 years. Many of them actually had a good start that attract more investors to put money into them but then burst. Is this a typical life cycle of hedge funds?

I also heard a conspiracy theory that some managers actually steal the money. Is it possible? Could the guys at LTCM took the money but said they lost them in trading?

hedge funds get paid on a percentage of the profits. if they make money every year everything in fine. its when they have a losing year that the problem starts. lets say they have a very bad year and lose 50%. they get no fees for that year and next year they have to make 100% to get back to profitable. since thats very unlikely they don't get fees the second year either. instead of trying to overcome this some of them just close their doors and return the money to investors. then they can just start another hedge fund and start over fresh.

Scientist · Sep 1, 2003

Quote from vhehn:

hedge funds get paid on a percentage of the profits. if they make money every year everything in fine. its when they have a losing year that the problem starts. lets say they have a very bad year and lose 50%. they get no fees for that year and next year they have to make 100% to get back to profitable. since thats very unlikely they don't get fees the second year either. instead of trying to overcome this some of them just close their doors and return the money to investors. then they can just start another hedge fund and start over fresh.

Is that true?

But wouldn't it be difficult to start all over again, i.e. get a new client base etc?

What a terrible business to be in! And I'm considering opening one myself!

Maybe I should just enjoy the freedom of being a private trader?

~Scientist

Scientist · Sep 1, 2003

Quote from hermit_trader:

I read an articles said that most hedge funds won't last for more than 10 years. Many of them actually had a good start that attract more investors to put money into them but then burst. Is this a typical life cycle of hedge funds?

I also heard a conspiracy theory that some managers actually steal the money. Is it possible? Could the guys at LTCM took the money but said they lost them in trading?

I've heard rumors like that. I think one thing we should observe is that money velocity can quite drastically change the equation. I hope you know what I mean with money velocity - I.e. dealing one contract of ES isn't the same as dealing 500, and dealing 5,000 SP's isn't the same as dealing 5. So much we know - The more money you have, the harder it becomes to maintain a certain % return. If some fund makes 200% on $5m, I'll go "ah yeah - next". I wouldn't even put my money in there. If another fund averages 70% on $500m, for 5 years in a row, I'll be impressed.

What happens when all those magic funds grow and their money velocity fades? Obviously in many cases they'll have to completely restructure their systems or complicate them. This could mean "the end" to a lot of hedge funds that grew with certain systems that worked well when they had plenty of money velocity and liquidity.

Just a thought.

However, I wonder how they could just "take the money" ? I mean, money isn't just a funny thing that floats around in an untrackable nowhere - right?

By the way, I love your quote! This is like totally the way I look at life! It's the only way to win - particularly as a trader. Just wanted to say that.

Best Compliments,
~Scientist

Aaron · Sep 1, 2003

The hedge fund industry really took off in the 1990's. Most of all hedge funds that have ever been created were created in the last 10 years.

Just like the mutual fund industry really took off in the 1980's. Most of all mutual funds that have ever been created were created in the last 20 years.

So the fact that most hedge funds you can think of haven't been around for more than 10 years and the fact that most mutual funds you can name haven't been around for more than 20 years isn't surprising.

Hedge funds are like restaurants -- if they can get past the first couple years they'll probably be around for some time.

And no, the managers of LTCM were not stealing the money. All but the smallest and newest of hedge funds are independently audited as well as regulated by the SEC or NFA. The incidence of fraud is extremely low.

You might think fraud is common because that is what makes headlines. What doesn't make headlines is the thousands and thousands of hedge funds that ethically go about their business year after year.

PoundTheRock · Sep 1, 2003

Quote from hermit_trader:

I also heard a conspiracy theory that some managers actually steal the money. Is it possible? Could the guys at LTCM took the money but said they lost them in trading?

The auditor / accountants would have something to say about that. The fund managers would probably be up on embezzlement charges in a matter of weeks. All contributions and withdrawals are tracked to/from the LP account. If you're going to invest in a hedge fund, give the accountants and attorneys a call for vetting - they're listed in the PPM. The whole notion of hedge funds being "unregulated" is a crock.