A speed bump for hedge funds?

No one can deny that hedge funds, as an industry, seem to be heading for more speed bumps. Let's face it, the industry is maturing. You've got a whole lot of funds chasing the same opportunities. And hedge funds being hedge funds, S&P 500-like returns really are nothing to brag about. For undisciplined funds, this could cause some trouble. In their quest for alpha, we could easily see more Amaranth-like situations. I really don't see another LTCM out there, given the capital and leverage rule changes. But you could get a bunch of Amaranths that add up to more PR problems for the industry. So 2007 will be a year where hedge fund managers really must demonstrate talent. Part of that involves shaving costs, and we'll see many consolidate their prime brokerage providers. I also agree with Merrill Lynch's assessment that we'll see more passively managed products arise--a sure sign of market maturity. If you're a pension, really, your goal is diversification within the asset class. Why not go with a low-cost index fund? Also, look for pension funds to seek investment funds from the capital markets, which give them a bit more flexibility.

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