For those who keep hearing about hedge funds but aren’t quite sure what they are: Think mutual fund with no rules. A hedge fund is an investment company that can do pretty much anything, from shorting currencies to betting on biotech takeovers to writing credit default swaps.
This kind of freedom, as you can imagine, requires a fair degree of creativity, if not genius, on the part of fund managers. And therein lies the problem. As the concept has gotten popular the number of hedge funds and the money they manage have soared. There are now 11,000 of them running about $3 trillion.
But have we produced 6,000 new super-genius money managers to handle all the extra money? Of course not. As in any other field, the sudden popularity of a concept just sucks in mediocre people from other niches. The result: Massive amounts of hedge fund money chasing pretty much everything, with an emphasis on what went up last year. The momentum trades are insanely crowded, and hedge fund returns in the aggregate have failed to exceed those of, say, an S&P 500 ETF for the past six years.
Yet the money has kept coming:
