New Hedge Funds Raised Less Money in 2006 on Amaranth

Date: Wednesday, February 7, 2007
Author: Andrei Postelnicu, Bloomberg.com

Feb. 7 (Bloomberg) -- New U.S. hedge funds raised less money in 2006 for the second year in a row because of a rout in emerging markets and the collapse of Amaranth Advisors LLC.

The 86 largest new hedge funds gathered $31 billion, compared with 82 funds and $34 billion in 2005, and 81 funds and $40 billion in 2004, according to a statement today from London- based HedgeFund Intelligence's Absolute Return magazine.

``Most of the launches were in the first six months of the year,'' according to the statement. ``But after the equity market meltdown last spring and summer hammered hedge funds, and Amaranth Advisors went bust last fall, raising money got harder for new funds.''

Established managers with track records had better success. Seven of the top 10 new funds were founded by veteran managers including Jack Meyer's Convexity Capital Management LP, which raised $6.3 billion in a record for a new fund, and former Morgan Stanley executives Vikram Pandit, John Havens and Guru Ramakrishnan, whose Old Lane LLC raised $3.7 billion.

Hedge funds managed $1.43 trillion as of Dec. 31, according to Hedge Fund Research Inc. in Chicago. Investors poured a record $126.6 billion into new and existing funds, a 29 percent increase from a year earlier, which had the weakest inflows since 2001. The funds are private investment pools catering to wealthy investors and institutions, which typically pay annual fees of 2 percent and 20 percent of any investment gains.

Trailing Benchmarks

Hedge funds returned 13 percent last year, trailing the 15.8 percent gain of the Standard & Poor's 500 Index of the largest U.S. stocks, the 14.3 percent increase of the Dow Jones Stoxx 50 Price Index of European shares and the 21 percent advance of the MSCI World Index denominated in U.S. dollars.

After commodities prices started sliding in the second quarter, Amaranth lost about $6.6 billion in two weeks on wrong- way natural-gas bets. It was the largest hedge-fund collapse ever.

Copper prices have dropped for four consecutive months, the longest decline since February 2000, and oil futures on the New York Mercantile Exchange are down 23 percent from an all-time high reached in July.

Because some hedge funds try to preserve investors' capital, they underperformed U.S. and European equities in the past two bull markets. The Credit Suisse Tremont Hedge Fund Index rose an annual average of 14 percent from 1994 to 2000, compared with 24 percent for the S&P 500 and 22 percent for the Stoxx 50. From 2003 to 2007, the Tremont index gained 12 percent, lagging behind the 15 percent advances of both the S&P 500 and Stoxx 50.

Convexity, Old Lane

Six new hedge funds raised more than $1 billion, only one of them in the second half of the year, according to the HedgeFund Intelligence survey. It was Dillon Read Capital Management's $1.3 billion Dillon Read Financial Products fund set up by John Costas, who used to run Zurich-based UBS AG's investment-banking unit.

The biggest new fund was Boston-based Convexity. Meyer started the fund after leaving as head of Harvard University's $29.2 billion endowment. The second-largest was New York-based Old Lane's, which ended the year with about the same amount of money it started with, the survey said.

For the first time since the survey was conducted, hedge funds that invest in bonds raised more money than those that buy stocks and those that use a combination of strategies. The 14 new hedge funds investing in debt raised $9.8 billion. A total of 17 so-called multistrategy funds took in $8.1 billion.

Distressed funds garnered $1.9 billion in three funds, a fraction of the $9 billion in the same number of funds in 2005.

HedgeFund Intelligence, which covers more than 6,000 funds, competes with Bloomberg LP in offering news and data on the hedge-fund industry.

To contact the reporter on this story: Andrei Postelnicu in London at apostelnicu@bloomberg.net .