Matt Levine's first point here is very interesting as a lens for understanding why so many large hedge funds seem to have difficulty beating the market, while the ones that do tend to be either smaller operations or more independent groups within the giants.
If you look at the best firms in the world, like RenTec or TGS, you see a trend where they typically stop taking in outside capital and effectively convert to family offices (at least for the most profitable strategies). Levine's point here is particularly applicable to RenTec; it has famously incredible returns via Medallion, but not so much the other funds. Unsurprisingly, the Medallion fund is entirely employee and owner capital.
As extremely profitable strategies scale up to their capacity constraints, fund managers naturally decide to pool greater amounts of their own capital into the firm. Therefore, "skin in the game" is not only effective as an intuitive heuristic for skill ("this manager believes in the fund enough to put most of their personal net worth into it"), but it's also practically effective for showing how likely the firm is to perform based on how much you're able to participate.
As the percentage of "skin in the game" increases, the likelihood of outside investors being able to participate decreases, because the fund managers know they no longer need to share risk, and don't want to waste allocations on the way to capacity constraints. If a firm is soliciting capital, it's highly suspect, and managers who go on to become the next Jim Simons or Seth Klarman will mostly be "on the market" for relatively short periods of time.
If you look at the best firms in the world, like RenTec or TGS, you see a trend where they typically stop taking in outside capital and effectively convert to family offices (at least for the most profitable strategies). Levine's point here is particularly applicable to RenTec; it has famously incredible returns via Medallion, but not so much the other funds. Unsurprisingly, the Medallion fund is entirely employee and owner capital.
As extremely profitable strategies scale up to their capacity constraints, fund managers naturally decide to pool greater amounts of their own capital into the firm. Therefore, "skin in the game" is not only effective as an intuitive heuristic for skill ("this manager believes in the fund enough to put most of their personal net worth into it"), but it's also practically effective for showing how likely the firm is to perform based on how much you're able to participate.
As the percentage of "skin in the game" increases, the likelihood of outside investors being able to participate decreases, because the fund managers know they no longer need to share risk, and don't want to waste allocations on the way to capacity constraints. If a firm is soliciting capital, it's highly suspect, and managers who go on to become the next Jim Simons or Seth Klarman will mostly be "on the market" for relatively short periods of time.