Consolidation keeps coming for hedge funds and other prestige sectors in finance

Business Insider (5/7/16): " Here's what the future of hedge funds looks like"

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There are ~10,000 hedge funds managing over $3 trillion in assets, but the top 10% or so manage around 90% of the assets. These large firms with long track records, huge back office support and all the bells and whistles institutional investors seek out will likely continue to attract the most investor capital. It’s the new “no one ever got fired for buying IBM.”

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It's part of the natural life cycle of industries. First, there are maverick pioneers. Then, more professionalism and rigorous metrics are used as market competition increases. Then everything becomes so mechanized that the big fish eat the small fish, and only a few brilliant niche players (see big personalities like Bill Gross or George Soros) can continue to operate creatively.

If you look at the Top 10 quant hedge funds today, you would get a list something like this: Two Sigma; Renaissance Technologies; AQR Capital; D.E. Shaw; Citadel; Point72 (formerly SAC); Tower Research; Jane Street; Winton Capital; Bridgewater.

Maybe the second tier would include Hutchin Hill, Systematica (formerly Bluecrest), WorldQuant (formerly Millennium Management), Ellington, Hudson River, Jump Trading, Morgan Stanley PDT, Man Group AHL, RG Niederhoffer, Highbridge, etc.

Then there are huge asset management operations like PIMCO or Janus or BlackRock--the last of which administers technological support to a lot of the other funds, and which had acquired Barclays Global Investors in 2009, long after its 1994 split with Blackstone.

And the blue chip management consulting firms (McKinsey / Boston Consulting Group / Bain) and accounting consulting firms (EY / PwC / KPMG / Deloitte) and niche consulting firms (Oliver Wyman / Protiviti / etc.) also are offering up technological support and advice, although this is mostly in terms of helping out with audits and regulatory risk compliance.

Really, though, the top talent is drifting toward the big players, who have invested heavily in huge talented teams to run sophisticated technological research operations. The profit margins from this will have to go down over time via natural competition, but one would think that there will be huge profit margins in the near future once this global recessionary period finally ends.

I imagine that a similar trend is occurring in private equity, although based less on human talent and sophisticated technology systems, and more on simply brand prestige in being able to get the best and most profitable deal flow. There will always be maverick characters like Bill Ackman, David Einhorn, Carl Icahn, et al., but the prestigious Top 10 now dominate: Blackstone, KKR, Carlyle, Fortress, Ares, Apollo, TPG, Bain, Oaktree, and Ardian.

In recent years, these PE firms have increasingly been poaching analysts and associates from the Top 6 investment banks (GS, JPM, MS, C, BOA, & WFC), along with some of the others like Deutsche Bank, Barclays, Lazard, Houlihan, Santander, BNP Paribas, etc.

The same, I suppose, is true in the VC world, where you have Sequoia Capital, Greylock Partners, Kleiner Perkins, Bessemer Venture Partners, Andreessen Horowitz, New Enterprise Associates, Accel Partners, Redpoint Ventures, Benchmark Capital, Highland Capital Partners, Institutional Venture Partners, Atlas Venture, etc.

Of course, with the upcoming implementation of the JOBS Act of 2012, you'll be able to invest in startup firms yourself:

Barron's (5/7/16): " Equity Crowdfunding Is Ready to Launch This Month"
Fortune (5/6/16): " Why Equity Crowdfunding Could Be Dangerous for Investors and Entrepreneurs"
CNNMoney (10/30/15): " Startup investing is no longer just for rich" ("Soon you will be able to invest in a startup even if you're not rich.")

Painting with a very wide brush and looking at this all at once, headcounts and profits and bonuses are still dropping everywhere, and yet, at the very top, the assets under management keep getting bigger. Once the global economy turns more bullish, it will be very good to be at the top.