Why In-House Hedge Funds Flop

February 7, 2008 |

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When you have been in, attached, associated with the hedge fund business as long as I have, the idea of an in-house hedge fund is an oxymoron.  Although I understand why established firms want to set up hedge funds internally, the idea never really sat well with me.  Why?

At its core, a hedge fund is a small business and an entrepreneural operation at heart.  It is a small business.  It is a business established by someone who believes in his own idea, his own abililty and his own experience.  A hedge fund manager is someone who wants to “take the risk” of setting up his own business to test his ideas, abilities and experience — all to make money.  But also, he is someone who wants to be autonomous … his own man, the owner of his own destiny.  Once the concept of a hedge fund is taken and moved under the umbrella of an established Wall Street firm, that special something, that ”secret sauce” and drive that makes a successful hedge fund manager, is lost.  I don’t care how many guarantees the umbrella firm puts into place, the autonomy — and the excitement — is lost.

When I saw the following post on Seeking Alpha, Few Firms Have Created Successful Internal Hedge Funds- I thought the writer did a nice job of elaborating on this topic.  In fact, he believes the issue is centered around compensation, autonomy, stability of investment capital, compounding of capital, branding and ego.  I agree.

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