John Chalsty, a longtime executive at Donaldson, Lufkin & Jenrette and its chairman at the time of DLJ’s acquisition by Credit Suisse First Boston in 2000, says that the brain drain from Wall Street and the mutual fund industry to the hedge fund space continues unabated; a recent survey of Harvard business school students, he pointed out, found that 60% planned to get into the alternative investment arena after graduation. Chalsty was keynote speaker on June 29 on the second full day of the MARHege Mid-Year Institutional Investment Conference in San Francisco, and not surprisingly, these days he runs Muirfield Capital Management, a New York-based hedge fund of funds with $900 million in assets. Chalsty is optimistic about the hedge fund industry, but predicted a shakeout among the current 8,000 funds, with a bifurcation into a large number of well-run firms that offer lower returns but with lower risk, and smaller firms that offer higher returns but with more risk.

As a former colleague of departing SEC chairman Bill Donaldson, Chalsty said he had commiserated with Donaldson’s predicament at the Commission as a Republican nominee who sided with Democratic commissioners to tighten the regulatory atmosphere in Washington. He predicted that Donaldson’s leave-taking would yield a new SEC that would be more likely to impose “benign” regulation on the hedge fund industry.