Hedge fund industry in transition - not about performance

Hedge funds launches, albeit off the lows from the Financial Crisis, have plateaued. Hedge fund liquidations don't match the declines of 2008-09, but have been steady. The post-crisis hedge fund world is more unforgiving for managers. The days of the smart manager hanging out his shingle and trying to build a business is over. Hedge funds should be a great entrepreneurial industry. The amount of capital needed is low. The only barrier to entry is skill. You should just need a good track record and a story and you should be able to attract money; however, that is not how the industry is working. 

The costs within the business have been going up in three areas. One, the regulatory and compliance costs have increased substantially. You could add in the cost of due diligence which makes infrastructure more critical to the selection process. Two, the cost of marketing has increased. First, the broader distribution process means that there is needed a large network for sales and marketing. Pension consultants also control more of the money flow in hedge funds which means a longer lead time and more work to show that the probability of failure has been reduced. The market is more divided into haves and have nots. Third, the banking and brokerage industry has increased the costs of transacting. It is not easy to get the clearing and brokerage lines in place to trade efficiently. 

We are not arguing that all of these changes are bad. There needed to be more standards and regulation. Marketing has changed and the ability to use third party services is all but gone. The cost of trading has gone up with the cost of capital for banks. The minimum necessary to make a good living is much higher than 10 years ago nd we have not even factored in the pressure on lower fees.

The hedge fund industry is maturing and the age of the individual talent starting his shop is ending.