Hedge Fund Speculation

Are Hedge Funds Becoming More Speculative?

Here is a question I recently received: "I recently heard that Hedge Funds have become so common of a financial instrument for institutions that they might not be providing the desired speculation. So the next generation of hedge funds must have to be more speculative, like a spec fund."

There are a of hedge fund managers in the industry now, over 15,000. This means that average returns will fall a bit and the quality of managers overall will have a lower mean...but I do not think it forces most hedge fund managers to be more speculative, in fact I think it has the opposite effect. There is so much competition now among hedge funds that institutional investors and the ultra-wealthy are becoming more picky wanting to work with hedge fund managers who have 5, 7 or 10 year track records instead of 3-4 year track records. They are also sometimes working with hedge fund products that have lower volatility and small max draw downs. All of these things reward the hedge fund managers that are "long term greedy" instead of "short term greedy." In other words to run a very successful hedge fund with several billion under management you need to take a long-term approach and making speculative investments would ruin your chances of ever making it past the 5-7 year mark and if by some grace of God you make it that far if your investments are very speculative you will probably have a very volatile portfolio with more than a few painful months along the way.

- Richard

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