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Some industry insiders would bluntly respond – yes, the mom-and-pop hedge fund pitches from small managers have had their day; regulations will push the start-up capital requirements beyond what small, successful family businesses and other wealthy individuals can do on their own, not to mention the bright, but poor, potential money managers who have good ideas with strong, back-tested results, but very little in assets under management.

In contrast to the pessimistic point of view (unless, of course, you are a large hedge fund or money manager wanting to keep competition out of the money management business), some will point to the incredible growth in alternative-investment mutual funds and other hedge fund-type investments as a sign that the universe could continue to have a bright future for all types of hedge fund managers, including small ones, regardless of Financial Industry Regulatory Authority’s (FINRA) desire to make it harder for the small guys to market to potential investors.

Total Assets of the Alternative-Mutual Fund Universe

Interestingly, based upon a review of the Wall Street Journal’s (WSJ) recent article “Mom-and-Pop Pitches Draw Fire“, the WSJ appears to be on the side of more regulation.  For instance, FINRA’s Brad Bennett is quoted as saying, when referring to pitches hedge fund managers sometimes make to the supposed “idiot” mom-and-pop investors, “With these things [referring to alternative-investment classes], it can be like giving a 6-year old a circular saw. Most mom-and-pop investors don’t understand the risks they’re taking.”

Other quoted individuals include Massachusetts’ William Galvin, who said “Our concern is there’s a different atmosphere now. Regulations have been eased on advertising, and these firms are using more aggressive sales tactics”; and Heath Abshure, Arkansas’s securities commissioner and president of the North American Securities Administrators Association is quoted, referring to alternative-investments, as saying “[they are] one of our biggest investment problems, and all our members are looking at them.”

To some, comparing potential investors in alternative-investments to giving a six year old a circular saw is quite goofy, with FINRA either trying to protect itself from supposed socially benevolent government regulators or acting as the front to protect large investment firms’ business, who have the resources to address the more stringent marketing requirements of their hedge funds to mom-and-pop investors.  Both are likely causes behind a “potential crackdown” on certain alternative-investment firms, most of which, no doubt, will be small investment firms (although the big firms will be the ones mentioned in the media).

Others, on the other hand, certainly view the potential investor as an ignorant chump, incapable of evaluating various investment pitches or strategies.  This group includes such people as many elected government officials, government bureaucracies, and several of the large asset management firms.  The winner of this regulation tussle is unlikely to be the small investment start-up or the consumer, who, in the end pays for the increased regulatory costs.

The hedge fund industry has long been a welcoming arena for bright individuals to get into the money management industry.  Whether that will continue to be the case depends on regulation attitudes and openness of investor demand to new managers with less of  a track record.  Should more open-mindedness and freedom to do business win what right now looks like a losing battle, small hedge funds will likely continue to have a bright future.

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On Thursday the U.S. Bureau of Labor Statistics released its first count of initial and continuing unemployment insurance claims for the prior week.  The initial claims figures came in at 333K, an increase of 5K over the prior week’s revised figure of 328K.    Although the most recent initial claims figures bumped up, many “trend” analysts pointed to the 6K decline in the four week moving average as a sign that the labor market continues to improve.

In terms of recent history, initial claims have been on an improving trend since peaking in early 2009.  Not coincidentally, over the same time frame financial markets have experienced a strong bull market, with, for instance, the S&P 500 up about 250 percent.

Initial Claims with the S&P, 2003 to Current

On continuing claims, the figures also came in higher, up 67K over the prior week’s 2.951 million.  As with the initial claims figures, a good deal of financial analysts and labor market observers pointed to the 2K decline in the four week moving average as a sign that the labor market is moderately improving.

Continuing Claims with the S&P, 2003 to Current

The now four year improvement in the initial and continuing claims figures might make some financial observers wonder: have initial claims bottomed out or are they close to bottoming out? The bottoming out question is certainly valid, given that claims are getting close to where they bottomed out at during the 2004 to 2007 boom years. How much lower could claims actually go?

With this background in mind, what do the initial and continuing claims figures have to do with hedge funds?  The connection is this.  If initial claims are getting close to bottom, then that implies that financial markets have some rough waters ahead.  With rough water ahead, which types of money managers are most likely to steer through the storm the best?  With some exceptions, the answer, at least when it comes to managing money in highly liquid markets, is hedge fund managers.

This is interesting because many investors have been wondering whether it is time to pull assets from the hedge fund industry, which has generally underperformed competing asset classes over the last few years.  Essentially, after a few years of under-performance, investors may start to shift money away from the hedge fund industry, exactly at the time when it would be best to shift money towards the hedge fund industry.

The crux of the issue, though, is whether the initial and continuing claims figures are close to bottoming out.  If you look at the two figures above, it’s hard to see the labor market figures continuing to improve much more for much longer.

Interestingly, the question comes down to whether investors will start to view their asset allocation strategies like the way hedge fund money managers do, at a time when they are wondering whether hedge funds are worth the money.

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Has It Been a Good Year for Hedge Fund Managers?

August 5, 2013

On the one hand are individuals pointing out that, on a year-to-date basis, hedge funds as a whole are under-performing market indices such as the S&P 500. This general observation is reflected below, based upon data provided by the analytics firm Prequin.  As a whole, through the second quarter of 2013, hedge funds gained 0.14 […]

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How Will Elimination of the SEC General Solicitation Ban Affect Hedge Funds?

July 22, 2013

On July 10th, the U.S. Securities and Exchange Commission (SEC) voted to lift the ban on solicitation for hedge funds and other accredited investor financial services. To some industry and advising professionals, this was a terrible idea that opens the door to fraud and other financial swindling (the SEC’s current commissioner is of this opinion). […]

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Asset Flows by Strategy through May 2013

July 15, 2013

Asset flows into hedge funds reached their highest level in two years according to a recent report by BarclaysHedge. In total, flows into hedge funds reached $18.8 billion in May, bringing total assets under management to about $1.9 trillion.  The $18.8 billion inflow comes on top of $430 million in cash inflow for April and […]

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What Does the June Jobs Report Mean for the Hedge Fund Industry

July 8, 2013

On Friday the U.S. Labor Department reported a total of a 195K net new jobs created for the month of June. The June jobs report’s 195K net new jobs figure matches exactly the revised May figure and is 4K lower than the April new jobs number of 199K. Overall, since bottoming out in late 2009/early […]

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Has Increased Size Bias Been Useful for the Hedge Fund Industry?

July 1, 2013

Over the past few years, a number of new trends have shown up in the hedge fund industry.  Among the changes are generally increased fund size to get a hedge fund up and going, increased compliance costs, and pressure for lower management fees. This article addresses the increased size bias. Hetty MacIntyre, in a recent […]

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