Word: mutuality
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...mutual funds traveled this trail of tears, Southern California math professor Ed Thorp was delivering positive, usually double-digit, returns every year to investors in the fund he launched in 1969. Thorp, probably best known for figuring out how to beat the house at blackjack, did this by programming computers to identify small price discrepancies between securities that should have been trading in tandem. Then he borrowed tons of money to bet that these discrepancies would disappear. Such strategies were off-limits to mutual funds, but Thorp's Princeton Newport Partners was a hedge fund--an unregulated investment partnership catering...
Today Thorp's progeny are everywhere, catering not just to rich people but also to pension funds and college endowments--and to not-so-rich people through listed hedge-fund stocks and hedgelike mutual funds. Thorp's was not the first hedge fund, and the term now covers all manner of investment beasts. But the approach he pioneered accounts for the bulk of the $1.43 trillion that Chicago-based Hedge Fund Research says hedge funds had under management at the end of the year. That's still puny compared with the $20 trillion in mutual funds worldwide. But because most...
This raises an important question: Are hedge-fund managers going to react as their mutual-fund peers did 40 years ago, taking bigger and dumber risks in a continuing quest to justify their paychecks? Or are they going to slide calmly into respectability and mediocrity? Will the hedge-fund boom end in fire...
...meltdown. "My opinion is that the most likely scenario is not a blowup but rather that hedge funds as a group will gradually and continuously lose their edge (if they haven't already) over other asset classes," he writes in an e-mail. "Then they will 'top out'--like mutual funds, real estate, etc.--and then just be a fluctuating fraction of total financial assets--part of the financial landscape...
...hedge funds are often closed to new investors, meaning that newcomers are apt to get worse-than-mediocre performance while still paying 1% or 2% of assets and 20% of the profits to the managers. There is a cheaper alternative: just as Vanguard launched the first stock-index mutual fund in 1976, Wall Street firms are beginning to offer low-cost funds that mimic common hedge-fund strategies. The first get-together of this nascent "hedge-fund replication" industry is happening this month in London (official slogan: The clones have landed). Mediocrity doesn't have to be such...