The Wall Street Journal recently ran two articles about the struggles of stock-picking hedge fund managers. Last week covered Jeffrey Vinik who is shutting down his fund just eight months after starting it, and today’s story covered the twilight of the stock pickers.
There are legitimate reasons that stock pickers have struggled; from low interest rates to growth over value and mega cap over everything else, but this is losing the forest for the trees. I think what happened here is very straight-forward and there is no need to over complicate it. Simply put, there is too much competition.
The Journal states that there were 530 hedge funds in 1990 managing $39 billion. Today there are more than 8,200 responsible for $3.2 trillion in investable assets.
Here’s an analogy, if you will:
The roads used to be much less efficient. Not everybody carried a map and not everybody knew how to read one. Those that did had the ability to go a different way. But today you hit traffic and everybody opens their phone and receives the same instructions. So when you get off the highway there are 20 cars in front of you and 20 behind. The roads, like markets, have become more efficient.
Hedge funds are an exclusive group of investors. These people were trained at the same schools and then at the same firms and then on the same strategies. They’re all following the same directions.
A lot of the headwinds on stock picking will eventually dampen and they will once again look like the very smart, highly trained investors that they are. And this can’t come soon enough, because the competition is a headwind I don’t think will ever reverse.