0/ During 2000-10, the top-tier hedge funds got fat on institutional capital. Performance suffered and many have returned capital. Some like Bluecrest have done well since, others haven't. Except for a few funds, most crypto funds aren't encumbered with institutional capital yet.
1/ In the early-mid 2000s, if you are a top trader at an investment bank like GS or a fund manager at a top hedge fund, the benchmark AUM at launch is $1B. Anything less is considered disappointing, and you won't get any love from top prime brokers like GS or MS.
2/ But too much capital can be a bad thing. In the last 10 years, many once promising hedge fund managers have found this out to their detriment. This includes Bluecrest Capital, Moore Capital, Jabre Capital and others. At their peak, many were managing tens of billions.
3/ Excessive capital does 3 things to a fund: a) it makes it harder to move in and out of positions without price slippage, so they end up investing in only the most liquid assets, and they forego the rich alpha opportunities among the smaller cap assets.
4/ b) With tens of billions in AUM, most hedge funds got fat. A $10B fund charging 2-20 fees, rake in $200M in management fees before they even generate any returns. What incentive is there to take risk and swing for the fences?
5/ c) the big institutional investors (pensions, endowments insurance, SWFs etc) are by default risk averse. They like steady returns of 10-15% p.a., not volatile returns even if they are higher over the cycle. Hence, they don't want their managers to take too much risk anyway.
6/ The result: many top tier funds ended up shooting for the mid teens returns their investors wanted, not the 30-50% returns the funds of the pre-2000 era were known for. Many undershot even this benchmark and returned less than the S&P 500's 11.9% 10-year CAGR return.
7/ With underwhelming returns, investors started to balk at the 2-20 fee structure. To retain investors, many funds started to reduce fees. For most funds, that bought time, but didn't improve returns. Eventually many gave up and either shut down or converted family offices.
8/ Many disgruntled former managers blamed the FED for distorting markets with QE. Others pointed fingers at algo funds and high frequency trading. A few admitted their own failings and mistakes.
9/ Lessons: i) be careful what you wish for. Too much capital can be a bad thing; ii) crypto markets are currently too illiquid for funds running hundreds of millions; iii) there is alot of alpha in the space but this alpha may accrue to the more nimble funds.
