Hedge Fund Launches Fall to Eight-Year Low
June 30, 2008
WASHINGTON - Volatile market conditions and the credit crisis have put the hard brakes on new hedge funds. The number of hedge funds launched in the first quarter was the lowest for a quarter since 2000, while fund liquidations increased from a year earlier.
There were 247 hedge funds launched in the first quarter, down from 251 a year earlier, according to Chicago's Hedge Fund Research. One hundred seventy hedge funds were liquidated in the three months, 23.2% more than in last year's first quarter.
The attrition rate, defined as the percentage of funds liquidated, was 1.68%, up "slightly" from a year earlier, the company said.
Single-manager hedge funds had the most liquidations, with 155 closed during the quarter. Of these, equity hedge strategies had the greatest turnover, accounting for over 50% of both launches and liquidations. Macro hedge funds, the top-performing strategy since the third quarter of last year, accounted for 20% of hedge fund launches in the first quarter.
Kenneth J. Heinz, president of Hedge Fund Research, said hedge funds are generating "essentially flat" returns, generally because of difficult economic conditions.
Heinz said he would be surprised if returns remained flat for the rest of this year. The HFRI Fund Weighted Composite Index has returned 13.4% on an average basis annually over the past 18 years, he said.
"I expect to see greater capital flows into the industry, but I think we will see a lot of those flows moving into larger funds," he said.
The HFRI Fund Weighted Composite Index, which tracks U.S. hedge funds, gained 0.11% for the 12 months ended May 31, and the HFRX Global Hedge Fund Index was down 0.2% through mid-June. "Consistent with the theme of lower investor risk tolerance as a result of credit, equity market and general economic weakness, there has been a decline in new capital commitments to the industry in 2008 and fewer new fund launches," Heinz said. "Investors continue to express a preference for funds with established track records and significant infrastructure."
Five years ago, he said, hedge fund managers could launch a fund with just $5 million to $10 million; now they need at least $25 million to $50 million to start a fund that could maintain enough stability to interest investors.
Companies with more than $1 billion of assets under management hold nearly 87% of hedge fund assets, according to Hedge Fund Research. It said there were $16 billion of inflows into hedge funds in the first quarter, but there were $30 billion of inflows into funds with assets of more than $500 billion.
"We are seeing a lot of money being redeemed from smaller funds, and a lot of smaller funds are being forced to liquidate," said Heinz, who expects more small funds to liquidate as "investors risk tolerance continues to decline significantly."
In 2005, the peak year for hedge fund launches, 2,073 funds were started and 848 were closed. Both launches and liquidations have declined steadily since then, even though industry assets under management have increased, from $1.1 trillion in 2005 to nearly $1.9 trillion as of March 31.
Hedge Fund Research tracks more than 12,000 hedge funds, including the 7,600 that are part of its HFR Database.
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