Technology has revolutionized the funds management business in the last 26 years. Back then, managers benchmarked against a stock, bond or other index and the best beat the rest of the pack; now a young manager can get lucky for two or three years, raise a lot of money and then blow it all going short when he should have gone long or vice versa. Market myth or wisdom said that, “you had never lost your virginity in the markets unless you had lost money in Volkswagen at least three times”. Experience doesn’t always provide the best results but it has some success in avoiding the bad ones.

Relationships were more important then. In my first job, I remember a manager telling me over lunch, “I like food and I like people. Remember that.” Surely a wonderful clue for a young learning to relate to his client. Managers had enormous freedom over their investments within their strict mandate. We had the discretion to buy and sell what we liked from any broker, which meant that we got the best out of them as an outsourced research facility.

Judgment was important. Funds management was an individual pastime. Performance was as critical then as now, but you could sell a good second quartile performing fund because clients knew that it might have a chance of being a good performer with lower volatility. The timelines are so short these days that clients only want to buy first quartile performance but usually suffer some quarters later as the fund falls rapidly to the fourth quartile. Clients today are also under severe short-term pressure and forget about the long-term, linear relationship between risk and return.

People occasionally made mistakes in their judgment, so as the industry got bigger, businesses began to monitor managers increasingly tightly. Naturally, when the growth of boutique hedge funds became acceptable, managers left in droves so that they could become less accountable again. Indeed, hedge funds require even more judgment as they have more moving parts to get wrong. Not only do you have to assess the asset allocation, investment selection and portfolio construction, but you can also go short in each element and all combinations in between. Private equity managers believe themselves to be different but they are not – they just have different combinations of the same moving parts.

Regulation has dramatically changed the face of the industry –no less in the years after 2008 when the Madoff scandal broke. Professional clients have raised their game significantly and investment consultants will now regularly visit their fund managers’ offices to see if they look the part.

Those who traded on non-public knowledge up to the mid-1980s stopped when serious regulation came in. I was fortunate to have been one of the first people to have been regulated from scratch in London, so I always knew that I had to obey the rules. Some of my contemporaries did not learn this until it was too late. Yet, even today people are misguided enough to disobey the rules and get away with it. Regulation has imposed a heavy fixed cost burden on money managers to ensure that they behave.

A great deal of legitimate money could be made in the old days, especially in a fast growing market, with a client base that loves investing and during a time of full fees. Then in the 1990s client power took over. Fees collapsed with the onset of competition, ways of offloading costs became prohibited or declarable, redemption fees became a thing of the past and management fees were pared, for pension funds, down to basis points.

The “killer app” appeared in the form of the hedge fund – such funds could make money in falling markets and seemed to be able to beat the long-term, linear relationship of return against risk – at least in the early days. Of course, in reality they can’t. Hedge funds can indeed reduce volatility and this is important for some clients, but they cannot break the risk-return relationship except over limited time periods in niche areas of investment. This is the elusive “alpha”. Nevertheless, money flooded in to new managers (a good deal of it inflated by leverage) and fees soared to pay for this magical new talent, making successful fund managers as rich as any human beings on Earth.

I have met few fund manager stars – we are generally as incompetent as each other. I have met people who are smart and do well for a particular time. But I have observed that the environment, as much as the manager’s talent, helped the stars. Much is true in the quip, “there are few professional fund managers – the best are merely gifted amateurs”.

The majority of the early Masters of the Universe have been proved to have feet of clay – often closing their funds when times got hard to allow their very wealthy managers to spend more time with their families. The example of early retirement on the back of extraordinary wealth is a heady mixture; it sucks in not just talent into the industry, but any talent.

Competitors in fund management have consequently abounded. Managers have flooded into the asset management world from all corners. Yet, funds managers need to be well-trained, by someone who themselves had been well-trained as an investor for public clients. Today’s fund managers come from a wide range of sources; bank prop desks, management consultants, investment bankers and generally anyone with a few million dollars to invest on their own or their friends’ account; all mixing with star and journeyman fund managers. Like any business, some of them are naturally good – but nature without a lengthy training apprenticeship is not usually an unbeatable combination.

It was perhaps in 2005 when I met an old friend who had tried just about everything – he announced that he was now a funds manager. I was happy for him but I couldn’t help thinking that, “I’ve been doing it for 20-odd years and it is still hard.” The industry is now far too crowded; managers are failing fast, even those with track records decades-long whose funds are performing well. There are too many managers, many of them not good enough. There are too many investment styles and processes that work in different environments; too many niche markets creating havoc for investing clients. And above all there are too few clients with cash that they want to invest.

Fund companies die slowly and die hard. It will take some years before the unsustainable are finally squeezed out and why we will see a closure of funds and people leaving the industry rather than a consolidation. Funds managers, football managers and politicians share one trait: their careers always end in failure. The survivors will be those with sustainability; well-managed big names, or focused managers running billions, a fortunate few boutique managers.

The author is the founder of Port Shelter Investment Management.