Two Former Treasury Secretaries Join Hedge Funds
On Thursday October 19th 2006, former Treasury secretaries John Snow and Larry Summers announced their intentions to join two separate, prominent hedge fund groups, the latest sign of the hedge fund industry's growing influence. This Reuters story has details on Mr. Snow joining Cerberus Capital Management LP, a $16.5 billion hedge fund group, as its chairman while Stephen Feinberg continues as chief executive of Cerberus. Former secretary Lawrence Summers, who served in the Clinton administration and this year resigned as president of Harvard University, is becoming a part-time managing director at D.E. Shaw & Co. Professor Summers will be retaining his Harvard professorship while advising the $25 billion hedge fund firm on strategy, portfolio management and operations.
Pension plans and other institutional assets (like endowments) are increasing their allocation to more speculative assets in the hunt for superior portfolio returns. As they increase the allocation to hedge funds, investors and industry analysts report that trustees and other fiduciaries want to see names of the door of people they trust. As the Reuters article concludes,
"As hedge funds are becoming more and more institutionalized they are looking like the investment banks of the 1980s," said Charles Gradante, principal at hedge fund consultants Hennessee Group. "Men like Snow and Summers open doors and they are the consummate deal makers," he added.
Indeed Summers and Snow are not the first well-known former government officials to join the hedge fund industry. Former New York mayor Rudy Giuliani's consulting firm helps raise capital for hedge fund The Clinton Group and former Louisiana Sen. John Breaux also joined the firm.
Toomre Capital Markets expects as the larger hedge fund groups become more institutionalized, effective enterprise risk management policies and procedures will become even more widely adopted, probably at the expense of the some of the superior alpha returns that the funds have generated to date. However, it also means that meltdowns like what happened at Amaranth Advisors in September 2006 are much less likely to occur in the future.
Interesting questions to consider going forward regard the size of hedge fund groups. What is the minimum amount of assets under management necessary to support the institutional infrastructure and people like former secretaries Snow and Summers? At what point are groups so large that they cannot effectively generate superior risk adjusted returns across the economic cycle? Your thoughts and comments are welcome.