BusinessWeek’s Steve
Rosenbush is worried. "Finance experts," he says, are concerned
"that hedge funds, as they grow and mature, are becoming too institutional,
too bureaucratic, and too risk-averse. The fear is that the returns at many
hedge funds are going to go from astronomical to average."
It’s not just hedge funds, either. Private equity, too, is likely to see its
returns go down, he says: "As the firms have raised billions of dollars,
they have had to turn to large-cap deals where it’s harder to find a bargain-basement
deal."
Are you feeling sorry for the high net worth individuals who have to make do
with 20% rather than 25% returns? You shouldn’t be. What Rosenbush astonishingly
fails to mention is that any remotely sophisticated investor can lever up hedge-fund
or private-equity investments as much as they like, whenever they like. If they
want more risk, it’s very, very easy to get it.
The point is that it’s not only hedge funds who can take on large amounts of
leverage — it’s investors in hedge funds, too. If you think that a
given fund is too risk-averse, you just invest in that fund using borrowed money,
and — presto — your risks and returns have gone up. It makes perfect sense
for hedge funds to be a little bit more risk averse, because that way they can
attract the broadest range of potential investors. If investors want more risk,
they can always add their own. The hedge funds are essentially leaving a bottle
of hot sauce on the table, rather than making all their meals equally spicy
for everyone.