Hedge Fund Has-Beens

Is the hedge fund bubble going to end with a bang or a whimper?

Count me in the second camp. In fact, it's already happening. Ever since the collapse of Long Term Capital Management in the fall of 1998, financial pundits have predicted another spectacular blow-up, precipitating another, and even bigger, global financial crisis.

And they're doing it again. The New York Times weighed in with a call for greater regulatory scrutiny of the industry. Slate.com's Matthew Gross even seized on the IPO of hedge fund manager Fortress(FIG Quote) to warn of "the coming hedge-fund apocalypse." Apocalypse, no less.

Are they right?

It's easy to find reasons to worry. These loosely regulated, speculative funds now control well over $1 trillion, according to the most recent estimate by Hedge Fund Research in Chicago. Most of that money has poured in over the last few years. Thousands of new funds have emerged to soak up the money -- each seemingly more amateur than the last.

It's three years since a friend commented, after the Fourth of July weekend, that "you can't go to a cookout these days without meeting someone who's running a hedge fund." It's gotten a lot worse since. Someone I knew at university is now running his own hedge fund. Based on what I observed of him many years ago, I wouldn't hire him to run a bath.