Hedge Funds: E-Business Redux?
Sep 14th, 2006 | Filed under: Hedge Fund Industry TrendsBy: Alpha Male
A countless amount of ink has been spilled on the topic of hedge funds in the past 5 years. Critics argue that hedge funds suffer from lax regulatory oversight, opaqueness of information and poorly defined mandates. But this view assumes a hedge fund is simply an unregulated investment entity using a miriad of possible strategies from traditional long-only public equities to quasi-private-equity. As a result, it misses the bigger picture about hedging. For all their real and imagined faults, hedge funds have done one thing very well - they have focused investors on alpha and shone a harsh light on the growing problem of index hugging in active management. It is this unique quality of hedge funds - and the fundamental industry changes it will bring about - that will be the lasting legacy of the recent “explosion” in the hedge fund industry.
Industries change incrementally as business processes are improved over time. For example, money management has become more efficient through scale, operational improvements and marketing acumen over the past 30 years. However, the basic business model has remained the same.
But occasionally, new technologies disrupt this pattern and lay the foundation for a fundamental re-organization of industry value propositions. These “disruptive technologies” often disintermediate existing value chains and enable customers to purchase a la carte, assembling totally customized products.
The Internet is one such technology. It had a profound and irreversible effect on, among other things, the travel industry. The Internet allowed customers to assemble their own vacations online, rather than relying on a travel agent to do so on their proprietary reservation systems. This forced us to ask the fundamental question, Why travel agents?
Hedge Funds and ETFs are another example of a “disruptive” technology. More…
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[…] Hedge Funds: E-Business Redux? […]
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