The lifecycle of hedge funds, non-directional funds slow (down) faster |
Date: Monday, February 4, 2008
Author: SeekingAlpha.com
From SeekingAlpha.com: Deephaven Capital Management, a $4 billion hedge fund, (last week) closed up shop on two of its merger-arb funds. The understandable reason: no one wants anything to do with mergers these days -- except for a certain Microsoft-Yahoo bid. But the rapid decline in the Deephaven funds -- which operated for three years -- may not be all that unusual, a new study out of Germany suggests.
To investigate how returns change over a fund's lifetime, Dieter G. Kaiser of the Frankfurt School of Finance and Management looked at 1,433 hedge funds between 1996 and 2006.
He split them up into two broad categories:
- Funds which attempted to profit from broad directional movements in markets which include strategies like global macro, long/short equity, emerging markets and distressed assets.
- Funds which look to profit from mis-pricing opportunities. The strategies these funds use include fixed-income, convertible and merger arbitrage and market neutral strategies.
The story was different for non-directional funds. They saw a much more dramatic decline in returns from 3.4 percent to 2.1 percent after three years.
Funds that bucked these trends usually had higher returns from the start.
Why does a hedge fund's return typically drop after the first couple of years? New funds have smaller teams which can respond more nimbly to mis-pricings and they're predominately founded in new markets to take advantage of arbitrage opportunities. But as the age old story with any investment strategy goes: once enough people learn about it, the opportunities start to vanish... Full article: Source
The full working paper can be downloaded at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1088845
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