Norman: Now you operate a hedge fund; you’ve been in the business for quite some time; you wrote this book, “The Future of Hedge Fund Investing.”What does the future look like? I mean, hedge funds have really evolved. There are thousands of them out there compared to a decade ago. Agarwal: That’s right. Norman: And there’s been some discussion, concerns about maybe there are too many of them. What do you see as the future for hedge funds? Agarwal: Well, the hedge funds are no longer a fad. That’s what they were considered, literally a decade ago. And people thought they were solely meant for the ultra-high-net-worth individuals, which was how they started. Norman: Right. Agarwal: But hedge funds are a very integral part of the financial system … Norman: How so? Agarwal: … of the global financial system in many ways. They actually do some of the largest volumes of trades on the New York Stock Exchange and the futures markets as well as on the global exchanges. So they’re big providers of liquidity to the market. And as you increase the liquidity, provide more liquidity, what happens to bid/offer spreads? They come down, which means it makes it cheaper for everybody to buy that stock or bond. But there are several problems with the way the hedge fund industry has evolved. Obviously, as more and more money has been thrown at the industry, you have not just the high-net-worth individual, but pension funds. In a lot of cases, government pension funds are investing in hedge funds. Norman: That’s becoming a huge part of the customer base of hedge funds, right? Agarwal: Exactly. And then you have banks, you have family offices. And as you know, the fee structure is incredibly high in the hedge fund industry. Norman: In general it’s 2 and 20, right? Agarwal: Generally it’s 2 and 20. Norman: Two percent management fee, 20 percent incentive. Agarwal: That’s right. But in a lot of cases, some of the more successful managers charge even higher than that; in some cases, as high as 5 and 50. Norman: But it’s very hard to get in. I think for most of those really top, top echelon managers, you can’t get into their funds. Agarwal: No, you can’t. Norman: Because they’re closed basically. Agarwal: They’re closed. And, in most cases, they’re managing their own money. Norman: Now you mentioned initially, originally, the hedge funds were there for high-net-worth individual investors. And now we see more institutions allocating money to hedge funds. What about individuals? Can individuals, smaller investors … is there any way for them to take part in hedge funds? Agarwal: Not really. Given the SEC regulations, even if a small investor wants to invest in a hedge fund via fund of funds, you still have to meet a certain income and a net-worth criteria. So it’s not open to, as you would say, moms and pops. Norman: Now the term “hedge fund” is kind of a misnomer, right? Because there’s not a lot of hedging in the classic sense, where you’re holding some instrument and you’re selling some derivative to try to lock in a price or a cost. It’s really very speculative in nature. Agarwal: Exactly. Actually the term “hedge fund” comes from the original hedge fund manager, Alfred Jones. The way he did this was he went long a bunch of stocks and went short a bunch of stocks. And he actually created a hedge fund portfolio. But nowadays, in my opinion, a lot of hedge funds are nothing more than closet beta guys, i.e., they buy the market. They say, “OK, I think the market’s going to go up. Let’s level up and buy two, three times.” And what happens then is when the market goes down, as it did in 2008, a lot of these so-called hedge funds suffered 40-50 percent drawdowns. That should never happen. | 
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