It seems almost everyone believes that the hedge fund industry is likely to undergo a major shift in the next couple of years. Overall, the hedge fund business may seriously contract, as institutional investors and wealthy individuals realise that the years of outsized gains they enjoyed through hedge fund exposure is coupled with far more risk than they expected. And it will likely consolidate, as under-performing managers are shunned in favour of better performers. Perversely, one of the results of Bernie Madoff’s scheme may ber less hedge fund diversification as investors flee to better known names in the hedge fund world. Further regulation, which increases compliance costs, will also make starting a new fund or operating a smaller fund more difficult.
So where should the entrepreneurially minded financial whiz go to make the big bucks? How about the hedge fund compliance and diligence business? While this business has already undergone something of a minor boom in recent years, it looks set to really take off as investors and funds engage outsiders to provide assurance that they are operating according to their promises.
Eric Jackson, the president of Ironfire Capital, an activist investment firm, thinks that the due diligence industry will quadruple in size.
The due diligence industry, which researches hedge funds and their managers, will quadruple in size. Today, there are few firms with expertise in this area (Due Diligence Consulting, Kroll and Backtracks are on a short-list of firms with expertise in this area). Investors will need to invest in hedge funds, but won’t be able to rely on the Securities and Exchange Commission to conduct their due diligence. They won’t mind paying for this work themselves.
Every great calamity creates great opportunities.