Hedge Fund Darwinism With Don Putnam

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For hedge funds and their offspring, the days of rugged individualism are numbered.

That's the thesis of a new study by Don Putnam, the investment-banking luminary who founded Putnam Lovell and spearheaded such storied acquisitions as Pimco by Allianz GroupAG and Zurich Scudder by Deutsche BankDB. The piece, "Adapt or Die Trying: Darwinism and Intelligent Design in the Hedge Fund Industry," depicts a future in which rapid consolidation squeezes out smaller money managers and funds of funds, leaving a landscape dominated by huge, multi-strategy advisers.

The ideas are getting a lot of notice, particularly among the ostensible victims, some of whom believe Putnam is a less-than-impartial judge.

"Look at his agenda: It's his best interest to cry fire, so he can recommend those mergers," says one fund-of-funds manager who read the white paper. (Putnam, who hasn't worked for Putnam Lovell since February 2005, helped facilitate the purchase of the fund-of-funds GAM by UBS.)

But Putnam says it's not so. "I've done so many transactions. When I tell you that very few funds of funds are going to survive, you'd better believe me," he says. "Would you, for your elderly parent, pick a doctor who believes in euthanasia?"

In a nutshell, Putnam's study says only a handful of funds of funds will survive the next five years. He also believes that hedge funds that specialize in one strategy are doomed and that most wealthy investors will start looking for retail boutiques -- finding them in Europe. It isn't all doom and gloom: Putnam believes that pension allocations to hedge fund assets will triple through 2010 and that IPOs will flourish.

Still, Putnam's key thesis is that funds of funds, with their double layer of fees, their lack of transparency and their lower returns, undeperform hedge funds and will eventually be replaced by multi-strategy shops.