Let’s be honest: the bulk of Wall Street analysis is dry-as-dust. It’s chock-full of spreadsheets, earnings estimates, and clunky jargon. The financial strategist and commentator who manages to publish an interesting read is a rare breed indeed. Even in that select group, Blackstone’s Byron Wien stands out for the consistently engaging quality of his work.

The chief investment strategist at Morgan Stanley (MS) for 21 years, Wien had a brief gig at Pequot Capital before landing his current role as senior advisor to both Blackstone (BX) and its clients in analyzing economic, social, and political trends. His latest dispatch, on the evolution of the hedge fund industry, offered his usual mix of perspective and insight. We caught up with Wien to further explore this most powerful segment of the markets.

You discuss a number of changes in the industry over the past few decades, not the least of which was the huge growth in assets under management from $40 billion in 1990 to $1.6 trillion today. That growth aside, what do you think is the biggest difference between today’s hedge funds and those in the swashbuckling era of Soros and Steinhardt?

The biggest difference is that early hedge funds were dedicated to superior performance on the upside and were willing to experience higher than normal volatility to get it. Current hedge funds are interested in asset protection on the downside and will give up upside points to get it. It’s a major change, from a focus on upside performance to a focus on downside protection.

I would ask you who the George Soros of today is, but I think it might still be George Soros. True?

Soros is still focused on performance, if that’s what you mean. But it’s pretty much all his money and that of his foundation.

So who will be the next Soros?

The thing about Soros is his consistent performance over a long period of time. In that light, you could make a case for Stan Druckenmiller or John Griffin.

You point out that the Volcker Rule will likely benefit hedge funds, in part as brokerage firms shut down their proprietary trading desks. Is this an instance where high-minded policy might have an unintended effect? That big risky trades move farther into the shadows than previously?

Those trades are surely moving beyond the purview of adult supervision. It may actually lead to more destabilizing risk than less. Before, proprietary trading, hedge funds, and private equity might have added some risk to the financial institutions that sponsored them. That’s what Volcker focused on. Now that they are spun out, they may lend more instability to the markets themselves. The institutions may be alright, but the markets may be even more destabilized as a result.

There’s still no agreement over the role of hedge funds, particularly with respect to short selling, in the crisis of September 2008 and even the fall of Bear Stearns. Did they play a meaningful part?

There is $178 trillion in financial instruments out there. Hedge funds accounted for $1.9 trillion at their peak. There may be more money at the margin, because they are more active, but the idea that they brought on the crisis is ridiculous. It makes less sense than blaming China’s currency on unemployment problems in the United States. I think they’re a legitimate investment enterprise today. They allow pension funds to minimize their risk in difficult markets.

One thing a lot of us learned about in the wake of the credit crunch was this whole concept of the shadow banking system, in which hedge funds had become a significant part of the underlying mechanism of credit in the economy. Are they still a vital part?

I think they are. But I view that as a positive, not a negative. It broadens the markets and it creates competition. I can’t think of a bad thing about it.

Can a hedge fund be too big to fail?

No hedge fund will ever get that big. Size is the enemy of performance.

But do we need to be concerned about black box funds like James Simons’ Renaissance Technologies having a computer bug that causes a flash crash? Or about hedge funds’ groupthink causing another credit or liquidity crisis?

Let’s go back one step here. Throughout the financial crisis, the federal government didn’t have to put up one single dollar to help out a hedge fund. They suffered, but never went to Washington with their hands out. Does that answer your question?

How is it possible that hedge funds continue to command the fees that they do — the so-called “2 and 20”, which is 2% of assets under management and 20% of performance? Even if they perform well, it’s still a sizable fee to pay for money management. Why hasn’t there been compression?

It’s a very high fee. I always thought it would be revised. I once wrote an essay in which I offered an alternative fee schedule where you had to beat your stated index. You would earn only the management fee up until your performance equaled your benchmark, and then you got 50% of performance beyond that. I’m pretty sure no one adopted it.

There are some funds that are cutting fees. They are going to “1 and 15” or “1.5 and 15.” But they’re cutting them for lockups. If you agree to lock up your investment for three years, you might get “1.5 and 15.” But the great lesson of the hedge fund industry is that you can’t compete on fees, which is a sharp contrast to the long-only industry. In hedge funds, you can cut your fee as much as you want and you will still lose money. Those that deliver performance can charge “2 and 20.” Those that don’t are more likely to be doomed.

You point out a notable statistic – that Exchange Traded Funds (ETFs) now make up 30% of NYSE trading volume, up from 15% just five years ago. Is that something we need to be concerned about for any reason?

Probably. It’s a lazy man’s way to get exposed. Here’s what you have to worry about. People don’t know exactly what they’re getting. Let’s say someone decides that they want exposure to China, India, and Brazil. People go and buy an ETF from Brazil. But the ETFs from Brazil are primarily weighted along market capitalization lines. [Oil & gas producer] Petrobras is the largest company by market cap in Brazil. So if you buy that ETF, you are really buying an energy ETF. The success of that ETF will be dependent on what happens to energy stocks, not necessarily the Brazilian market. If you are lazy and you don’t analyze your ETFs, you may not be getting what you think you’re getting.

Everyone looks forward to your ten annual surprises essay published at the beginning of every year. Want to give us one in advance?

I’m not sure I can help you there. I start work on that on October 1, and it’s October 7 today. And it’s going to be hard this year. But here’s one for you: Right now almost everybody is disillusioned about the administration and they’re not optimistic about the economy. It would be a big surprise if next year turns out to be a very good year. We have some structural impediments that are quite significant that can get in the way of that, but that’s would make it a surprise.