Institutional or Institutionalized- Are Hedge Funds Crazy?

! The hedge fund industry is becoming more “institutional”:! successful hedge funds and funds of hedge funds (FoHF) are becoming established,! institutional investors are ready to allocate to absolute return strategies, and! institutions employing a full line of products are gearing up to distribute hedge-fund based products to all their clients – sophisticated as well as mass market. Still, many traditional investors find hedge funds wild and woolly, and wonder if they are crazy or in the grip of the latest fad.! We expect hedge fund assets to hit $2 trillion by 2010 on the back of middling returns of 9%. Underperformance of traditional managers helps drive the inflows, but more important is the erosion of the barriers to entry for supposedly "benchmark " investors. Despite the complexities and grim surprises, absolute return strategies with asymmetric fees should more and more be seen as profoundly in the interests of investors.! With more investors will come more scrutiny, forcing transparency and coherence on the reclusive, secretive hedge fund world. This is vital to “institutionalizing ” the quest for absolute return – a key regulatory thesis is that disclosure facilitates consistent performance, and risk measurement brings lower risk.! Who will dominate the industry? We nominate those that rigorously control process and risk – they will attract the most sophisticated intermediaries, and in turn the largest share of assets – and those that source new talent for new products to ruthlessly replace tired strategies and personnel. It ain’t pretty and often it will not be fun, but absolute returns are enhanced by absolute Darwinism: the “sell discipline ” is replaced by the “kill discipline.