Can Baby Boomer Hedge Funders Survive in the Next Decade?
Posted on 06/20/2020
Many of the top hedge funds have been managed by hedge fund managers who made their heyday in the late 1980s, late 1990s, and during the 2000s. As some Western central banks embrace select verses of modern monetary theory (MMT), many of these hedge fund managers have struggled to adapt, some closing shop in the 2010s. Is it a generational mindset impacting hedge fund honchos born in the 1950s and 1960s?
Baby boomers (Boomers) are the demographic cohort following the Silent Generation (often referred as The Greatest Generation) and preceding Generation X. Boomers are most often defined as individuals born between 1946 and 1964, during the post–World War II baby boom. Many of these hedge funders were educated at similar institutions, started work at similar establishments, and embracing similar belief systems. For many of the successful hedge fund CEOs today, it has worked. And since the 2010s, many hedge funders in this age cohort have shuttered funds. Billionaire Michael Hintze was born in 1953 and he founded hedge fund firm CQS. CQS has struggled to gain traction in recent years. In June, CQS decided to cut 50 jobs, mostly in sales and support to focus on their core credit trading strategies. Luckily, for many of these hedge funds that have accumulated massive amounts of AUM, their founders net worths continue to grow unabated. Hintze has a net worth estimated at US$ 3 billion. Ray Dalio, who was born in 1949, founded Bridgewater Associates, a behemoth in the world of hedge funds and risk parity strategies. Dalio has an estimated net worth of US$ 18 billion. Like other hedge funds, according to IAPD data, Bridgewater’s AUM fell down to US$ 138 billion in April 2020 versus US$ 163 billion in February 2020. In the middle of March, Dalio wrote on LinkedIn to confirm reports that Bridgewater’s flagship fund, Pure Alpha, had fallen roughly 20% for the 2020 calendar year.
In the coming decade, based on past data, most likely large hedge funds that have become institutionalized will have a high chance of remaining in business, while smaller hedge funds that depend on key people, will struggle to remain open to third-party investors, or would eventually turn into family offices of the founder.
Many of these hedge fund and investment management executives have had their education grounded in modern portfolio theory, a whole universe of formulas, ideas, and frameworks that were developed by Harry Markowitz in the 1950s. Markowitz introduced the concept of the efficient frontier into modern portfolio theory in 1952. Modern portfolio theory, or mean-variance analysis, is a mathematical framework for assembling a portfolio of assets such that the expected return is maximized for a given level of risk. Thousands of investment products have been grounded by the modern portfolio theory framework. A major flaw in this theory is expected value on asset classes – risk, return, and correlation factors are based on these expected values. Did allocators think the U.S. would get be off the gold standard in the 1950s? Did allocators ever conceive that some major Western countries would embrace negative interest rates or pump massive injections of liquidity into the marketplace?
Two other disadvantages of older investors is the probability that some cannot properly interpret the latest trends and technology. Younger cohorts are typically associated with the Zeitgeist. Technology is a game-changer that can wipe out entire industries. At the time when the baby boomers were young, many of the leading investors at the time couldn’t grasp the power, or at least the market impact of the internet. Value investor legend Warren Buffett often consulted Bill Gates on investments and technology throughout the later years of his investment career. The last disadvantage is wealth. Motivation and ambition are character traits that could lead to hedge fund positive performance versus individuals who spend time buying art, tweeting on social media, accumulating mansions, purchasing fancy cars, and cutting ribbons.
Will millenials be more effective managers of money in the future, as the baton gets handed down? That is a whole other topic.