As a $2 trillion industry with annual compensation in the hundreds of millions, hedge funds’ financial success is second to none. And yet, according to one of the industry’s progenitors, the future of this lucrative business is in the balance.
At the University Club in Manhattan on Sept. 17, hedge fund owner-turned-philanthropist Michael Steinhardt forecasted a rather gloomy future for the industry he helped to cultivate. His talk, “Then vs. Now, and What Lies Ahead for Hedge Funds,” kicked off the Fordham Wall Street Council’s fifth year of hosting dynamic speakers for the Fordham business community.
Steinhardt, the chairman of WisdomTree Investments, Inc., entered the field of money management more than 40 years ago. His career took off in 1967 when he formed his own hedge fund company, Steinhardt Partners L.P., which he managed until he closed it in 1995 to establish the Steinhardt Foundation for Jewish life.
Steinhardt said that when he launched his company, hedge funds were “on the fringe.”
“Hedge funds were viewed skeptically and as un-American,” he said. “There were ‘legitimate’ accounts, and then there were hedge funds — inherently speculative, manipulative, shorting markets. Any bad thing that could be said about hedge funds, was.”
The mistrust didn’t faze Steinhardt, however. He instead resolved on becoming “the best money manager in America,” focusing exclusively on maximizing the company’s performance and his investors’ return on investment.
“We would try whatever we thought could succeed. [Employees] would wear t-shirts in our office saying, ‘What do you know that the world doesn’t know?’” he said. “I thought it was important to have one’s own view that was distinct from the rest of the world.”
Over the next few decades, hedge funds experienced exponential growth. At the end of 1970, a total of 11 hedge funds existed worldwide; today, there are more than 10,000 active hedge funds. Moreover, Steinhardt said, the industry has become the most highly paid business in the world, creating more billionaires than any other field.
Its wild success has not come without drawbacks, Steinhardt noted. As a result of its unparalleled growth, performance has suffered.
“There are too many people doing the same thing without being able to distinguish themselves,” he said. “The opportunities are narrow in the hedge fund world, and it is sinking under its own weight.”
Steinhardt said that the “extraordinary financial opportunity” has caused a glut of hedge funds, many of which prove unsuccessful. To further complicate matters, the investor population has shifted from individuals to primarily institutions. This will be problematic in the long term, Steinhardt said.
“The constraints of institutions tend to result in managers with less courage, less contrarianism, and less superiority of performance. The markets have been strong and forgiving [up to this point], but that won’t last forever,” he said. How hedge funds will fare going forward “remains to be seen.”
The event was co-sponsored by the Schools of Business, Ernst & Young, and by Gabelli Funds, the firm managed by Fordham benefactor Mario Gabelli, GBS ’65.
Formed in 2010, the Fordham Wall Street Council fosters collaboration among business students, faculty, staff, alumni, and friends who are interested in capital markets. Council members interact with the Fordham business community in many ways, including meeting and mentoring top students, becoming involved with business faculty to enhance their academic research efforts, and helping to boost the visibility and mission of the Fordham Schools of Business.