Hedge fund legitimacy

20Oct06

Longtime readers of this blog know that one of the major themes here is the role and impact of hedge funds on the capital markets. In a recent post we discussed the difficulty hedge fund managers are dealing with in the face of increased mainstream media coverage of the industry.

We would be remiss in noting a couple of items that demonstrate that the hedge fund industry is despite some headwinds still going gangbusters. Alistair Barr at Marketwatch.com notes a study that shows that inflows into hedge funds remained quite robust in the third quarter of 2006. In fact inflows were at a level not seen since 2003.

If that weren’t enough, two prominent hedge funds have lured two former Treasury secretaries into employment. DealBook reports that John Snow is joining Cerebrus Capital Management and Lawrence Summers is joining D. E. Shaw. A cynic could simply dismiss these two appointments as mere window dressing by two large hedge fund groups intent on gilding their reputations.

One could spin this news another way. This looks like another step in the continued mainstreaming or legitimizing of hedge funds as viable investment vehicles. Although hedge funds have penetrated a number of institutional investment arenas, most prominently university endowments, there are others that remain behind the times. Those might include some state-run pension funds. Having prominent political figures on board who can bring their reputations and connections to bear on these hedge fund holdouts.

In contrast, Rob Cox and Edward Chancellor at breakingviews view the Summers hiring as a curious one. Given his run-ins at Harvard over endowment investment issues they Summers an unlikely hedge fund asset. Time will of course tell in this department.

Hedge funds have had some bad publicity of late.  That will not derail this trend towards hedge fund legitimacy, which is well underway. At some point we will no longer distinguish between hedge funds and other mainstream investment organizations. More time, increased capital and some more prominent hires will ultimately make it a reality.

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