The Golden Era of Hedge Funds Draws to a Close with Clients in Revolt

I think what we're seeing is a significant shift away from actively managed funds to passively managed funds, like index funds. People are becoming more educated about personal finance and are recognizing how much active management fees eat into their returns. There are also much more options than there used to be (e.g. ETFs).

It's the winner-take-all phenomenon, it crops up everywhere

So income inequality comes to hedge funds?

In tech there is an interesting phenomena I've watched emerge several times; A new technology or process gets going, it has lots of players, the market grows until the technology matures and then it splits where the high end gets more high and the middle dies. New players keep appearing but they can't jump the void between new player and high end player.

So for semiconductors there were dozens of chip companies and they all had various things they made. Then the market matured and only the people who could reliably fab chips remained at the top. The good middle companies were absorbed into the top, the not great ones died, and now you've got some boutique small ones (fabless) and the big guns.

For "personal computers" or the PC space same thing, lots of companies, then fewer and fewer, and then just a handful.

For Web companies same thing, lots of companies, then fewer and fewer, and then just a handful.

(and interesting to see technology that sort of fizzled like personal robotics and 3D printing)

Given that the incoming administration is pretty friendly to wall street I would expect at least some boost for the industry.

If anything, we'll see a skew towards smaller funds. Fact is, it's mindbogglingly difficult to achieve stellar returns with a lot (>= 500MM) of money. At those to sizes, a lot of great strategies fail to scale effectively.

250-500MM is a nice amount of money to manage. It lets the fund pay its small employees nicely and it doesn't have to deal with the logistical nightmares of needing to move massive amounts of capital around.

The startup <50MM and small <250MM funds will continue to be of interest to investors since they often can employ profitable strategies at that scale.

If I have $100k, where should I put it in ?

It's been that way for quite a while. E.g. there was a book written (perhaps in 1955) titled

   Where Are the Customers' Yachts?[1]
   or A Good Hard Look at Wall Street

As one review puts it[2]: The title came from a story about a visitor in New York more than a century ago. After admiring yachts Wall Street bought with money earned giving financial advice to customers, he wondered where the customers' yachts were. Of course, there were none. There is far more money in providing financial advice than there is in receiving financial advice.

[1] http://www.wiley.com/WileyCDA/WileyTitle/productCd-047177089...

[2] http://www.fool.com/investing/general/2014/02/21/where-are-t...

you should see what small time real estate promoters out west charge for fees.

> VC returns on average over the long term have been underwhelming.

Genuine question: why do VC's continue to exist?

it's insanely competitive due to low barriers of entry and availability of leverage / capital. the phd part is incidental in the same way an mba is to a lot of the banking world: it's a hoop that demonstrates rational competence (they were accepted to such and such great program), and it's a base to begin selecting for personnel.

I would guess because its a cheap (in terms of time) way to search for really bright people. Obviously not the only way, and not fool-proof, but if you find someone who loves math and science enough to devote ~10 years of their life to it, chances are they're pretty sharp - at least in certain ways.

I wouldn't say their patterns and algos "need" that level of research. But what a hedge fund doesn't have is a lot of time to waste interviewing junior programmers/undergrads hoping to find nuggets of wheat in the chaff.

Try your hand at stochastic partial differential equations

From my experience (for a sub 100mil aum firm, 1 day or grater in a any given position), the stuff people use is mathematically simple: moving average crossovers and correlations between assets. All it requires is usually enough init funds to for it to be worth your time vs crud apping it up an taking it easy.

I have no degree nor any desire to seek one out.

It's not the altos themselves.

The better hedge funds are full of PhDs because it takes that level of education to avoid the Dunning Krueger effect, and in this market niche, DK can bankrupt you fast.

Reputation and credibility is important in attracting fund flows. Wouldn't you rather put your money with the guy with a team of PhDs?

I've heard from a some friends on that career track that Wall Street hires physics PhDs not because the background is relevant (what they're doing isn't published in any curriculum - that's the point), but because it exercises the right set of cognitive skills, and they need the kind of people who graduate from top-tier physics PhD programs, even if they don't care about the physics.

> what algos and patterns in quantitative finance need a phd level of research ?

Require a PhD? I'd say about none of them.

If we turn around the question to: "What algos and patterns in quantitative finance can be done by a 18 yo out of high school?" I'd say about none of them too.

The average to-be-programmer can't fizzbuzz. The average to-be-quant can't do basic statistics.

I don't know about the US but the universities I've attended in EU are extremely selective with Maths. Requesting a master or PhD is a good filter for anything math related.

I don't think the people who use the robo-advisors are the same kind of people who have been using hedge funds.