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Small hedge funds close at higher rate than large funds

Date: Wednesday, April 30, 2008
Author: Hedge Funds Review

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Small hedge funds have a turnover rate that is much higher than large hedge funds, according to a study by HedgeFund.net (HFN). Funds with less than $15m in assets under management account for 21.6% of the HFN database.

This group accounted for 46.9% of the turnover. They are defined as funds removed from the database due to liquidations, failure to report performance or by request of the manager.

Hedge funds with assets of $250m or more account for 30.2% of the database. This group accounted for the smallest percentage of turnover, 9.8%.

The study measured funds leaving the database as of April 15, 2008 and compared it to the same period one year earlier.

Funds focusing on structured credit securities account for 0.6% of the database . They accounted for 4.1% of the fund removals during the period.

This is in line with the problems in the credit markets and the relatively poor performance these funds have produced since last summer. In the last six months ending March 2008, the average structured credit focused fund is down 4.29%.

Fixed-income arbitrage funds experienced higher turnover rates compared to a year ago. The funds make up 1.9% of the database and accounted for 5.2% of the turnover. Last year this group accounted for 1.5% of turnover.

Funds focused on convertible bond related strategies also had an elevated removal rate from the database. The funds accounted for only 1.3% of the database yet accounted for 4.1% of the turnover.

Despite above average losses in 2008, emerging market hedge funds have not had above average rates of removal from the HFN database. This indicates investors may be willing to accept more volatility in these funds.

Commodity and foreign exchange focused funds have lower turnover rates this year. They account for 5.3% of the database and make up only 2.1% of the funds removed.

Funds domiciled in the US experienced high turnover rates. These funds account for 30.4% of the database and make up 47.4% of removals. Funds domiciled outside the US account for 69.6% of the database and comprise 52.6% of the turnover.

Despite the favourable trends for funds investing in broad Asian markets, the removal rate was elevated for funds focused on investments in Japan. These funds account for 2.7% of the database and accounted for 4.1% of the removals.

The HFN Convertible Arbitrage Average is down 2.92% in 2008, slightly worse than the hedge fund industry average. The HFN CTA/Managed Futures Average was up 8.33% in the first quarter of 2008, the benchmark’s best first quarter ever.