Leaving Lake Wobegon
Oct 13th, 2008 | Filed under: Media Coverage of Hedge Funds, Today's Post
With so much breaking news to digest recently, it’s difficult to find the time to look down the road at what’s coming next for the alternative investment industry. Critics of hedge funds often evoke images of the fictional Lake Wobegon where the children “are all above average”. But the current market crisis may finally help us all move beyond this tired metaphor.
To begin with, the FT peered into the crystal ball last week to predict how the asset management industry would look when the dust settles.
“…the credit crisis could accelerate the change already blowing through the asset management industry and reconfigure it so that risk management becomes centre stage and hedge funds become part of a bigger absolute return sector.”
And in the mind of at least one industry expert, the future is all about alpha (and beta)…
“‘The credit crisis is causing an inflection point,’ says Suzanne Duncan, the financial markets industry lead for the [IBM] Institute [for Business value]. ‘Asset management chief executives think the industry is going to change significantly “and they don’t know how they should react’. Ms Duncan thinks this is good news rather than the reverse.”
“She expects three types of players to emerge as the dust settles: in the jargon of the industry, there will be firms focusing on alpha, beta and advice.
“Investment banks will become beta, or market return, providers. Their leverage levels will drop from the 30 times common today to perhaps 10 times - the same as commercial banks. That will cut in half their return on earnings, leading to an exodus of “talent” to the buy side.
“That will lead to growth in the alpha, or skill-based, industry. ‘We will see alpha providers getting much bigger,’ says Ms Duncan.”
Despite this endorsement for alpha-centric investing, the FT remains somewhat skeptical…
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