Totally agree...only large strategy I've heard they've completely closed is converts. Still huge into options market making, etc, etc. And new funds are always being started by alumni from these flagships, esp Citadel as their deferred comp from the boom years has come rolling in.
This is a topic I've been considering for a year. There's too much money chasing too little alpha (i.e. edge). What I've been asking myself for a year - what happens when the average hedge fund yields only 6%, and the 5 year T-note also yields 6%, with much less fluctuation in returns, and much greater safety of principle? Get your money out of hedge funds first. Before the next major lockup date expires.
Treasury "I" Bond 30k min. 6.73% might be a 5 year. From Treasury Direct Wonder what % of funds that bond outperforms 20%? 50%? 80%? Funds diversifying? Into what, real estate. Got that. Plenty around too. Foreign market investing? Got all that with IB. And duh - we have gazillions of ETFs. Only dopes going into hedge funds I say. Or foreign criminals. Or other non performing funds or institutions trying to diversify the nonperformance. Housewife opening a CD down at the bank for the kid can probably do better. Few big failures or revelations of serious criminal activity or misconduct and that industry is yesterday's news, or at least regulated. Remember "The Firm"? Ha ha. Fire away boys!
Being that the most successfull firms combined probably only control about $100bb in assets, I don't think a major liquidation among minor players would be good at all for the overall market performance in 2006. All the good news about economic indicators would be mute if there was a mass cash-out. With a lot of the funds trying to extend lockups to 2+ years in the next couple of months, we could see some HF liquidations in January.
Because if the market takes a shit a la the internet bubble burst, hedge funds won't drop like rocks. Ya, sure, you can get the same or better performance with an index fund in the short term, but over the long term a hedge fund gives you a nice, steady equity curve instead of a volatile chart of the S&P.
IMO, that's a pretty large assumption on your part. In aggregate, you might be right, but there is no assurance that the particular fund one might have selected out of the 8000 or so out there, will stay affloat. BTW, I'm not endorsing mutual funds as any better alternative, I just believe that is near impossible to categorize the entire alternative fund industry in such black and white terms.