Will entrepreneurs save the hedge fund industry
As we’ve seen recently, the hedge fund industry is going through hard times and many doubt it will ever return to the glory days when hedge funds were the crème de la crème of Wall Street, says James C Paine (pictured), founding partner at West Realty Advisors & the Head of Acquisitions…
2014 was a challenging year for hedge funds. Stating that hedge funds “don’t merit a continued role” due to complexity and high fees, the largest pension fund in the nation, Calpers announced in September it would exit it’s USD4 billion in hedge fund investments. Comparing the S&P 500 and equity hedge funds doesn’t paint a very nice picture either. While the S&P added 11.4% in 2014, funds gained only 2.1% according to data published by Hedge Fund Research, Inc.
Capital outflows and hedge fund closures reached new highs as well and we aren’t just talking startup funds, we’re talking household names like Steve Eisman’s Emry Partners and Paulson & Co.
So, what can turn the industry around? It’s hard to say if anything can. But we are at the forefront of times that desperately need change and one particular group is slated to bring that change. Entrepreneurs.
When Congress passed the Jobs Act, it opened doors not only for crowdfunding potential, as was widely covered by the media. It also opened doors for new entrepreneurial fund managers to enter the industry and have a chance to apply their creativity to capital fundraising. However, many hedge funds are not taking advantage of this new ability, citing fears of uncertainty since many of the fund investment strategies are regulated by the SEC and the CFTC as well.
Take for example INVST, which announced it's beta launch in July by two former E*Trade executives and marked the first online network for institutional alternative investment funds via crowdfunding. Or HedgeZ which uses data to serve as an online matchmaker between hedge fund managers and potential investors. Along with countless others, these new services are leveraging advancements in technology, regulations and, most importantly, the mindsets of investors. As the world becomes comfortable with doing everything on the internet, fundraising will likely evolve in a similar way.
For many in the industry, they seem stuck in their ways and mindsets of “That’s how things were always done, why change now?” This mentality is common in industries when change begins to take place. As we’ve seen in the past, some decide to go with the flow and evolve, while others fail to see the trends and slowly fade away. You reach a tipping point when enough people ask, “Why?” and change follows shortly thereafter.
Will these drastic industry changes take place overnight? Of course not. But many in the industry can agree that change needs to happen and if it does not, the industry stands to fall even further down on the list of desirable investments for institutional and retail investors alike. When times get tough, some run away and some ignore the problems and pretend they don’t exist. But a small group decides they are ready to shake things up and go off the beaten path. For hedge funds this group will be enterprising entrepreneurs who are not afraid to ask “why?” over and over again until they come up with their own answer to the industries problems.