Hedge Funds Do Serve A Purpose

I have written before that I don't think most folks need to invest in hedge funds. Plenty of them are run by smart, good people and do very well, but as a product they may be better suited to institutions.

They are probably not right for someone with less than a couple of million of investable assets.

Hedge funds provide liquidity to all sorts of markets. Liquidity, in theory, should create efficiency. Today it might be right to wonder if the create too much efficiency. The other night Alan Greenspan posited that perhaps hedge fund demand had artificially pushed yields down in the treasury market. They may have but I don't think hedge fund buying is the catalyst because yield curves all over the planet are getting flatter.

The flaw in hedge funds (remember all investment products have drawbacks) might be a crowding of the industry. There are a zillion different types of hedge funds (maybe only half a zillion?) and in each type there are now many more funds in each category than a few years ago. This seems to be more of an obvious threat in something like M&A arbitrage. If ten years ago there were 20 funds arbing a deal where today there are 300 (out of the 8000 funds that are thought to exist) all trying to arb the same deal it becomes much more difficult to make money. It is only logical to think the spreads would close much faster.

Long and short equity funds would seem to be the least impacted because they don't all have to go after the same 35 stocks.

I have readers that work in the hedge fund industry. It will be clear that I am no expert on this topic but I'd like to think I know a thing or two about supply and demand. There is a lot of investor demand, but I think that will be driven more from pensions and endowments looking to place hundreds of millions as opposed to individuals with $100,000 to plunk down.