Hedge Funds Too Big to Succeed?

BusinessWeek: Paulson’s $32 Billion Funds Prompt Too-Big-to-Succeed Concerns

The world’s largest hedge funds are approaching their previous peak assets after recovering from their worst-ever losses and investor outflows in 2008. They are benefiting from a shift by pension funds and endowments to established firms with steady returns and staff dedicated to risk management.

Fourteen firms managed $20 billion or more in hedge funds at the start of 2010, when industry assets stood at $1.6 trillion. Hedge funds oversaw a record $1.9 trillion in mid- 2008.

In 1998, only George Soros’s Soros Fund Management LLC and Julian Robertson’s Tiger Management LLC exceeded the $20 billion mark. Within two years of hitting that milestone, both firms had suffered big losses and decided to stop managing money for other investors.

“There is a point where you can be too big to generate returns,” said Lawrence P. Chiarello, a partner at Red Bank, New Jersey-based SkyView Investment Advisors LLC, which selects hedge funds for clients. “Being large and able to build a strong infrastructure are good things, but in general I think the pendulum has swung too far.”

The size at which a fund may become too big depends on factors such as its investment strategy and the markets in which it trades, Chiarello said.

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