At Milken, Hedge Fund Managers Swap Ideas on Staying in Business

The future of hedge fund management? Struggling to stay alive.

Ricky Sandler, the founder of Eminence Capital, introduced himself as being part of “a dying breed" of stock-pickers. "But surviving," he quickly added.

Hedge fund professionals Sandler, Dawn Fitzpatrick, Dmitry Balyasny and Andrew Feldstein, speaking on a panel at the Milken Institute Global Conference in Beverly Hills, California, tried to be upbeat about the future of industry. They couldn’t manage for long -- quickly turning sour on fees, investor demands, the surfeit of funds and the cost of doing business.

Before the financial crisis,“we used to be able to get high returns with limited volatility," Sandler said. But investors’ obsession with protecting against downside risk has "sowed the seeds of very mediocre returns and high fees."

Three trillion dollars in hedge fund assets is "way too much," said Balyasny, founder of the multistrategy firm Balyasny Asset Management. “There might be a couple hundred funds in the world -- as opposed to 10,000 -- that can consistently generate alpha, if that, at scale," he said.

Covering Expenses

To be around 10 years from now, "you need the ability to cover a $100 million expense base," said Andrew Feldstein, the chief investment officer of BlueMountain Capital. The firm has been able to raise capital that’s locked-up for several years, even for liquid strategies, by cutting fees, he said. BlueMountain has used that cash to research such efforts as trading credit using quant strategies.

The value-oriented Sandler has been investing in data science too, following the lead of fundamental managers like Steve Cohen, Dan Loeb and Paul Tudor Jones who have all tried to better incorporate quantitative techniques into their business.

"In aggregate the value delivered has been disappointing," said Dawn Fitzpatrick, who is chief investment officer for the family office of George Soros. Fund returns are likely to fall given that it’s the late stage of the market cycle, she said.

Still, there’s one fund that everyone wants in on, regardless of the cost.

“I remember when I was running a fund-of-funds I really wanted to get into Renaissance Medallion," Balyasny said, referring to the employee-only vehicle run by Renaissance Technologies that has posted annualized returns of about 40 percent even after sky-high fees. “I’m still interested, by the way!"

— With assistance by Erik Schatzker