Billion-dollar titans such as DB Zwirn and Polygon threw in the towel. Five of the best-paid managers endured a pantomime grilling by Congress. Authorities muttered about more regulation (even though it was the most regulated players in the financial markets, namely banks, that were going bankrupt in droves). Bans on short-selling removed funds' main mechanism for risk management, leading to an acceleration in the withdrawal of capital when the market needed it most. Redemptions flooded in, many of them from institutions that had over-committed to private equity and needed cash wherever they could find it.
The basic economics of the industry are now changingThe closer hedge fund pricing gets to the asset management mainstream, the more it becomes a scale business. One per cent of an initial $100m, for example, might be enough seed capital to get a fund up and running with a small team of half-decent managers. If it achieved 10 per cent upside through performance, it would have another $1m to spread round as a bonus. If a fund starts out with just $50m, however, it could struggle, no matter how stellar the returns.