We hear a lot about “green shoots” in the economy.  From recent unemployment data to Bank of America’s Q1 results to a bottoming-out of home prices, the media is beginning to report on so-called “hopeful signs of life.”  Even the hedge fund industry is getting in on the game with solid April performance, stabilizing AUM and a “re-un-coupling” of returns from equity markets (after appearing to be attached at the hip in the fall).

But the analogy of green shoots after a harsh winter may not be the best for the hedge fund industry based on the comments from several speakers here in San Francisco at this “no-media” gathering of funds and institutional investors this week.  It’s almost as if a forest fire might be a better analogy.

As a teenager, my father spent summers as a forest ranger in Northern Ontario (not far from Timmins, childhood home of Myron Scholes).  As residents of Northern Ontario can attest, fire is devastating to humans, but is often a natural part of the forest ecosystem.  Without it, brush can build up over the years, causing Santa Barbara-sized headaches.   But with it, weaker trees die, providing more access to sunlight for their stronger surviving brethren.  To be sure, those survivors also get scorched and lose their needles.  But they soon recover; relying on the cleansing effect of forest fires to “re-set” the forest ecosystem and set the stage for future growth. More…