Smart money reaches $1 trillion

The Economist reports that hedge fund assets under management have reached $1 trillion, even while returns have diminished. Only qualified investors (an SEC classification) are eligible to invest - the requirement is $1M in net worth or $300K per year of family income. I guess most physics profs are stuck with mutual funds, which might not be so bad given the 2/20 fee structure charged by hedge funds ;-)

If your kid is mathematically gifted, I suggest pointing him (or her :-) to the nearest "relative value arbitrage" fund, rather than grad school in physics :-) With the glut of money heading into hedge funds, I've been told that the number one shortage is in investment ideas! You can see this in the graph below - the variation in returns is going down as more and more funds pile onto similar strategies.

Institutional Investor's obsessively read list of most-highly-paid hedge-fund managers starts with familiar names (George Soros: $750m), but 16 others made at least $100m in 2003... Successful managers become rich, possibly too rich to care about work, in just a few years.

I've discussed the role these funds are playing in the bond market, plying the carry or curve-flattening trades: sell the short end and buy the long end of the yield curve. Hedge funds are the third largest holders of US Treasury debt after Japan and China.