The economies of scale and money management
When performance is down, there will no incentive fees to lean on to help pay the bills. This issue is especially the case for smaller managers. Small firms cannot use the incentive fees to recoup their start-up costs and management fees are just too low. Down years also lead to more manager switching, so marginally sized managers who lose assets will be harmed more. If there is little dispersion in returns, investors will use other criteria for determining investment decisions. Size will matter more in these cases. What you gain with economies of scale in up years, you lose in down years. Fixed costs are harder to cover.
If there is more fee compression, larger firms will be better able to either sustain a fee cut. Surprisingly, larger firms have been able to maintain fees better than small firms which is another scale problem. With the retailization of funds, scale is also more important in order to have the marketing to reach smaller investors.
Expect more firm closings and greater average size for managers. Talent in small firms will be harder to find.
The regulation of banks and other financial institutions leads to carry-over effects on all money management firms. Prime brokerage and clearing becomes more expensive. Bank have to hit higher capital requirements and ROE targets in the current environment. This also drives the industry to seek scale.
Consolidation because of clearing and regulator costs will affect all hedge funds and lead to firm consolidation.
More money will be spend on better execution. This has the potential to improve returns, but it creates another barrier to entry for the small firm that does not have access to technology.
Get bigger or you will be crushed under scale, regulation, and execution costs.