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Too many hedge funds spoil the sector

Hedge funds regularly close or return money to investors, so the decision last month by David Muschel to return capital to investors in his Jemmco fund ought to have been unexceptional. But the explanation he gave gives pause for thought. Some of the fund's strategies, he said, simply cannot perform in today's environment.

He singles out decimalization, low volatility and ?enormous pressure to deploy capital to hedge funds that, once modest in size, have grown to billions of dollars in assets, many competing to exploit the same inefficiencies. I can see that the history of compressed opportunities is going to continue for more time than many of us have the patience to wait.?

Could it be that there are too many hedge funds? It could be merely a function of the low volatility that has beset the market for much of this year. But even when opportunities do come along there are so many players waiting to take advantage that spreads soon dry up. Merger arbitrage is a case in point. Fewer mergers and many more players have led to any opportunities quickly disappearing when mergers are rumoured or announced, although it is one of two strategies, along with credit structure arbitrage, that Muschel still sees value in and will still run.

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