Hedge funds have been a very good asset class for me individually, and a spectacular place to have money over the years for investors in general. But I’m negative on hedge funds now, and I’ve been de-allocating to them. I noticed when I was doing my tax returns that I now have less money invested in hedge funds than at any time since I was 25 years old. And there are a couple of reasons for that.

The first is based on the Efficient Market Theory. When I was speculating on the floor of the Chicago Board of Trade, financial futures were just beginning, and I was trading Ginnie Maes. And it was a wonderful period in the market: spreads were wide, and there were lots of ways to make money. At night, I would walk downtown to the University of Chicago, where I was getting my MBA. And I remember sitting in the classroom listening to Nobel Laureates talk about the Efficient Market Theory, and they had copious proof that such a theory was accurate and in existence. And I used to sit in the back of the class and snicker at these guys, because I had just made $50K that day on a risk-less arbitrage.

Now, at age 50, I realize that the Nobel Laureates were exactly right. But they were early. This was before Cantor Fitzgerald and Telerate and CNBC and the Internet and Yahoo! message boards, and what I’ve observed is that the market is en route to becoming more efficient every single hour, and it’s been an extraordinary march. When I began investing in managed futures and hedge funds, I remember that the first manager I invested with was charging six and 30, and I think that the first six or seven managers I invested with all had management fees of 6%. And I was happy to pay that, because the opportunities that those managers were capturing were so significant that the fee was irrelevant. That’s not the case today. And as the market has become more efficient globally, the returns are simply harder to extract. There are more and more people—including guys in their bathrobes sitting in their home offices—trying to extract these arbitrages and inefficiencies, and those opportunities are quickly disappearing. The spectacular growth rate of the hedge funds industry is largely responsible for that.

My other observation is one that might be even scarier, and it’s caused me to de-allocate to US hedge funds in particular. My overall investment thesis is that US civilization has peaked. I recently gave a speech in Silicon Valley called “Lenin Was Correct”. It raised a lot of eyebrows, but this was my thesis: Lenin said that the capitalists would sell the rope that would be used to hang them, and I always tried to figure out what he meant by that, and I finally figured out what the rope was. The rope, in my opinion, is our business model itself. Capitalism itself is going to cause the peak of US civilization. I believe it’s happened. Of course, it’s happened thousands of times before in history at various scales, but I just want you to think about that as you’re analyzing investment vehicles or managers. My main benchmark for this type of analysis is an arbitrage model—my measure of civilization is based on the standard of living, and I believe that right now our standard of living is declining vis a vis the rest of the world.

I just cannot believe the pace change, given the Efficient Market Theory and information flows and so forth. The unit of time in our lifetime has collapsed, and things are happening faster than ever before. This is another challenge for those of us who are looking in the world of alternative investments for inefficiencies and extraordinary returns. I think it’s going to be a tricky time and I urge caution out there.

I do think emerging markets are quite interesting. I just got back from China a couple of weeks ago and I’m preparing a trip now to India. My first investment in private equity in India was 1992, so it’s been on my radar for awhile. But the problem with the Efficient Market Theory is a problem for hedge funds worldwide. I learned last week that there are 10 hedge funds that have been organized just to trade carbon credits. I thought that was phenomenal. That’s the kind of thing that you see in an Efficient Market Theory, or in capitalism itself, where you have a living, breathing organism that extracts any kind of advantage or profit that it can. And that’s happening worldwide. Some people think that the emerging markets are an easier place to make money, but they are quickly becoming as efficient as we are. In China, for example, there are more cell phones than we have people. So the inefficiencies in China are being arbed out very, very quickly, as they are in India.

While I’ve reduced my allocation to hedge funds, I’ve been very aggressive in what I call alternative energy, including alternative mining. I’m starting to sell some of my ethanol plays, which have gotten a little too frothy. I’ve just done one satellite deal, and I’m looking at another, so I’m leaving the earth to find alpha.

Bradley Rotter is a professional speculator who is currently focusing on applying capital and attention to enterprises that can impact the security of the homeland. He is well known as a a pioneer investor in alternative assets and has managed his own portfolio of CTAs and hedge fund investments since 1980. He has been a speculator for most of his career and has an extensive proprietary investment track record that spans from commodities to private equity. He serves as chairman of the board of AirPatrol Corp, a wireless security company.  Bradley is also on the Board of Halo Maritime Security, who is delivering an innovate and robust marine barrier to protect assets against "swarm attacks" such as that that occurred at the USS Cole.