FROM HOT TO NOT: The Four Stages Of A Hedge Fund

Just years ago, top hedge funders reigned as untouchable masters of the universe.

We’ve come a long way, according to this week’s Bloomberg Businessweek cover story from Sheelah Kolhatkar chronicling the downfall of the hedge fund.

After years of scoring almost offensively huge profits, kingpins are returning investor money, finding themselves under greater legal scrutiny, and watching as the regular old S&P outperforms their once skilled market formulas.

Kolhatkar provides us with the 4-stage evolutionary life cycle of the hedge fund:

  1. “During the early period, when a fund is starting out, its managers are hungry, motivated, and often humble enough to know what they don’t know. This tends to be the best time to put money in, but also the hardest, as the funds tend to be very small.”
  2. “Stage two occurs once the fund has achieved some success, when those making the decisions have gained some confidence but they aren’t yet so well-known that the fund is too big or impossible to get into.”
  3. “Then comes stage three—the sort of plateau before the fall—when the fund gets “hot” and suddenly has to beat back investors, who tend to be drawn to flashy success stories like lightning bugs to an electric fence.”
  4. “Stage four occurs when the fund manager’s name is spotted as a bidder for baseball teams or buyer of zillion-dollar Hamptons mansions. Most funds stop generating the returns they once did by this stage, as the manager becomes overconfident in his abilities and the fund too large to make anything that could be described as a nimble investing move.”

For many industry titans — from George Soros to Steven Cohen — it seems as though we’ve hit stage four. As Kolhatkar writes, “After a decade as rock stars, hedge fund managers seem to be fading just as quickly as musicians do.”

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.