Hedge Funds Launches vs Closures

Since January 2005, a total of 2,622 new hedge funds have been launched, according to a report by Hedge Fund Research Inc., released on wednesday. But figures also show that 1,071 hedge funds have shut in the past two years, as competition has squeezed profits.

Even some veteran managers, in a bid to boost returns, have made concentrated bets that have backfired, two funds set up by Hans van Hoof, the former Europe chief of Soros Fund Management and another fund run by Thierry Serero, a former manager at Fidelity Investments’ Fidelity Europe mutual fund. All this has set up the $1.23 trillion industry for its first meaningful consolidation, Wall Street executives say.

In just the past few weeks, Amaranth Advisors LLC lost $6 billion, and Narragansett Management LP in New York said it will return $800 million to investors, two European based hedge funds recently have told investors they are shutting down one or all of their funds, also the Vega Select Opportunities fund, which manages about $1.4 billion, lost about 11.5% of its value in September.

The fund closures, which stem from a variety of reasons, underscore a numbing fact about the hedge fund business: Even though new hedge funds seem to be popping up every day, almost half as many funds have been closing their doors since 2005.

About 300 hedge funds manage more than $1 billion each and represent roughly 90 percent of the assets in the industry today. “In the older days, raising $100 million was great,” says Richard Portogallo, head of U.S. stocks at Morgan Stanley. “Now it is not going to be good enough.”

HFR said a record $42.1 billion was added in the second quarter after $24 billion flowed in during the first quarter.

Hedge Fund Research Inc. is a firm specializing in the aggregation, dissemination and analysis of alternative investment information. The company produces HFR Database, the industry’s most widely used commercial database of hedge fund performance, as well as other research products for the alternative investment industry.