Tuesday, April 24, 2007

Sell, Sell, Sell

A recent New York Times article cautioned that the rich are getting out of hedge funds.
"Some 38 percent of the wealthy investors surveyed [net worth > $25 million]
had money in hedge funds in 2005. That number fell to 27 percent last year, and
the amount of money that wealthy investors had in hedge funds fell by an even
greater percentage. The average balance, which was $2.8 million in 2005, was
just $1.6 million last year, a 43 percent decline."

Okay, pretty scary. But I think a far scarier fact is that hedge fund managers are getting out of hedge funds.

Let's say that you believe that hedge fund managers are the smartest investors on the planet, and that they use their macrocephalic intellects to deliver above market returns with little risk. If that was the case, then presumably they wouldn't be frantically selling themselves off.

Fortress Investment Group has already IPOd, and the article linked to above describes nearly a dozen others who are rumored to be heading out the door. Even my old employer, D. E. Shaw & Co., L.P. (incidentally, the world's largest hedge fund) sold a 20% stake in its business to Lehman brothers for a multi-billion dollar price. (Congrats David!)

When the smartest money in the world starts cashing out, perhaps it's a sign that now isn't the time to jump in.