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Alternative Market Briefing

Other Voices: "Winner-take-all" dynamics and hedge fund investing

Wednesday, April 26, 2017

A growing stream of thinking in microeconomics is the concept of "winner-take-all" dynamics. The idea seems simple. A combination of networking economics and classic economies of scale creates situations where there are just a few dominant firms or economic agents who are able to capture significant market share in a given industry. With the advances in technology over the last decade, many industries are seeing the impact of winner-take-all dynamics leading to the result of greater concentration.

There have always been economies of scale with a firm, but there were limits based on geography, distribution, or just the ability to gain broad exposure. However, with the internet and the ability to communicate information broadly and quickly, the power of networking generates further economies of scale.

There are some classic winner-take-all markets. For example, the music industry is dominated by a few singers who capture all of the market. Software, search engines, operating systems, or social media, have all become winner-take-all markets. The first mover or close followers are able to gain strong market positions that cannot be broken by new entrants.

We may now be seeing the beginning of winner-take-all dynamics with hedge fund investing. The combination of scale for investing with wide distribution has caused large hedge funds to get larger and more dominant regardless of performance. Think of winner-take-all networking and scale and you can see the how size mat......................

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