HEDGE FUNDS CAN BE FOOL'S GOLD ON WALL ST.
By DANIEL STRACHMAN
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July 6, 2003 -- Running a hedge fund is often considered the way to truly ride Wall Street's road to riches. Some of the most successful managers earn in the tens of millions of dollars a year.
It seems that every six months or so an article appears telling how much money hedge fund managers are making - causing more and more Wall Street professionals to look to hedge funds as their future source of wealth.
But many of those who believe they'll find riches by simply hanging out a hedge-fund shingle will quickly learn a tough life lesson: All that glitters is not gold in the hedge fund business.
While data on hedge fund survival rates are a bit sketchy - since these investment vehicles are not required to report information to one central place, as mutual funds do with the NASD - most industry observers know death comes fast and furious to managers who can neither raise money quickly nor suffer a year of poor performance.
"If 100 funds start in a year, something like 90 of them will fail before they reach a three-year mark of being in operation," one industry observer said.
"The reason for the high failure rate is that everybody thinks . . . the money will just flow into the fund, and then the business will generate fees that flow into the manager's pocket - and that is just not the case.
"It takes a very long time to get established and to build a following with investors, and if the manager cannot perform, they are doomed to failure."
Raising money is probably the hardest thing to do on the Street. That, coupled with the fact that investors have short attention spans, is a recipe for disaster in the hedge fund business.
Raising money is something many people are unable to do, partly because they don't understand the sales process and because the industry is so crowded.
"Everyone starts off excited and thinks they are going to be the next Julian Robertson or George Soros," a manager who requested anonymity said. "But the problem is that not everyone can raise a fund or build a sustainable business - and, right now, everybody on Wall Street is trying.
"When it comes down to it, unless you come from the right pedigree, have extremely wealthy friends and family, or have won the lottery, it is very hard to get off the ground."
A lot of people call themselves hedge fund managers, and investors don't want to take a chance on an unknown manager.
Throw in market volatility, and even the smartest, most experienced managers will have a hard time finding success at the end of the hedge fund rainbow. |
