Don't Mourn for Hedge Funds

Date: Thursday, June 4, 2009
Author: Glenn Hall, The Street.com

JPMorgan Chase (JPM Quote) is closing down its hedge fund business and two Boston funds also decided to give up the game.

Apparently, the opportunities are drying up for hedge funds, which some say profit by manipulating the market with short sales, derivative plays and leveraged positions. (The truth is that nobody really understands much about what hedge funds do because they operate largely outside of the normal regulatory environment).

One way to interpret the decision by JPMorgan to exit the hedge fund business, following similar moves by Credit Suisse (CS Quote) and Deutsche Bank (DB Quote), is that big banks are refocusing on businesses they actually understand.

This could also be a correction in the market, which became overrun with hedge funds.

For a while there, new hedge funds seemed to be springing up all over the place. Along with JPMorgan, Citigroup (C Quote), Bank of America (BAC Quote), Wells Fargo (WFC Quote) and Goldman Sachs (GS Quote) all joined the game, directly or indirectly or both. And they spawned many more hedge funds as their top traders left to start their own funds in search of even more wealth and glory.

With more than a trillion dollars in the hedge fund universe, we're talking about an incredible accumulation of market-moving potential.

Many funds boldly flaunted their power, giving themselves names like "Raptor Capital Management", which is one of the Boston funds that is shutting down. "Gyrfalcon" was the name of the main fund managed by Noble Partners, the other Boston group that's closing down its funds.

Birds of prey - nice imagery there. But I'm not saying all hedge funds are bad or that having an ominous-sounding name implies any wrongdoing.

Hedge funds can play an important role in the markets. Some used their power for good, supplying capital, playing the role of private equity investors or buying large stakes in companies and serving as activist investors to bring about changes.

Even those funds that play a more rapacious role serve a purpose. Whether we like it or not, every ecosystem needs predators in the food chain.

But when there are too many predators, the whole system breaks down. Fortunately, ecosystems have a natural tendency to return to a more balanced state. And that's what is happening now.

So there's no need to mourn the death of a few hedge funds.