Another sign of the impending hedge fund apocalypse

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Daniel Gross has a new piece up on Slate about all the former big-name government officials joining or starting hedge funds. He lists a few (Madeleine Albright! Larry Summers! John Snow! Former SEC chairman Richard Breeden!), then writes:

Let’s set aside the question of whether the arrival of politicians is a neon sign to hedge-fund investors to Cash Out Now!

No. No! Nooooo! Let’s not set that aside. That is the big question. Actually, it’s more of an answer. It’s sort of like the “skyscraper index” that my former Fortune colleague Devin Leonard wrote about a couple years ago: When a company erects a giant new skyscraper as its headquarters, sell the stock. New skyscrapers are expensive, they’re extraneous, they’re a sign that an organization has lost its way.

At hedge funds, the boldface names actually do serve a purpose: They help get the fund’s salespeople meetings with pension fund managers and rich people. They’re asset gatherers. But that’s a bad sign, too. For decades, mutual funds gathered assets while the much-smaller hedge funds focused on beating the market. Not surprisingly, mutual fund returns tended to trail the overall market while hedge funds appeared to beat it (there’s a lot of controversy about whether they actually did, but, uh, let’s set that aside). Now the hedge fund industry has $1.43 trillion under management (according to the latest data from Hedge Fund Research). I’d say its market-beating days are behind it.

Update: I’ve responded to one of the comments (the one defending Larry Summers) here.

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