Have Hedge Funds Eroded Market Opportunities?

Abstract

Hedge funds, with almost $1 trillion under management before leverage, have become a dominant force in market trading. As they grow larger, they will eventually erode the market opportunities and mispricings they have relied on to create their superior returns. Opportunities seem to disappear fastest where hedge funds are very active and remain ample where there are fewer hedge funds. This article discusses whether and how hedge funds erode opportunities in interest–rate, credit, equity, and currency markets. The authors believe that this erosion will prove temporary, with new active trading opportunities emerging in the near future.