Hedge Fund Question of the Week – Winter Edition – No. 8

Does every hedge fund end in a dumpster fire?

Answer:  No, but it takes some effort to avoid the fate.

A conference speaker once suggested that every hedge fund eventually ends in a “dumpster fire”.  The organizer wasn’t so pleased considering the audience, the sponsors and the colorful imagery.  But the comment resonated with many in attendance.

Hedge funds have a certain life cycle, and it seems that many do meet an untimely end.  Some for obvious reasons – extended poor performance, an out-of-favor strategy, or an inability to achieve a critical mass in AUM.  Others fail due to the ineffective or inefficient operation of the firm.

Nevertheless, many funds do avoid a sudden and disruptive end . . . because they work at it.  

Some firms successfully transition to new leadership.  Transitions are tricky, in part because investors typically look to invest with the founder.  But changes that are well managed over a period of time with buy-in from investors have been successful. Other firms follow an orderly wind-down that best protects the interests of investors and stakeholders (including employees) through a thoughtful and deliberate process.   

So to avoid a “messy end”, it’s best to plan ahead . . . well ahead.