HFN highlights spike in attrition rate seen in hedge fund database

Hedge fund data provider Hedgefund.net has reported a spike in the number of funds removed from its live database last month as a result of liquidation, failure to report performance or the request of the manager, with small funds, those focusing on structured credit, funds domiciled in the US or investing in Japan among categories experiencing disproportionately high turnover rates.

HFN, a division of Channel Capital Group, has conducted an internal study of turnover rates in its database of more than 8,100 hedge funds, funds of funds and CTA products in order to determine hedge fund categories that experienced abnormal levels of funds exiting the database as of April 15 relative to their weight in the database and compared with the same period of the previous year.

According to HFN, it maintains tight restrictions on how long funds are allowed to remain in the live database without updating monthly performance. It attributes the spike in funds removed from the database in April principally to the difficult economic environment but sought to assess the extent to which trends in the database correlated with those in financial markets.

'The size and quality of the HFN database provides us unique insight of hedge fund industry trends,' says Donald Cacciapaglia, chairman and chief executive of Channel Capital. 'Our experience with monthly performance reporting and the results of our hedge fund asset flows report warranted a closer look at attrition rates among funds.'

The study found that funds reporting less than USD15m in assets under management account for 21.6 per cent of the HFN database, yet accounted for the majority of fund turnover at 46.9 per cent, while funds with more than USD250m in assets represent 30.2 per cent of the database, but the smallest proportion of turnover, 9.8 per cent.

HFN says this breakdown is in line with historical trends of higher turnover for smaller funds, but runs counter to the impression left by media stories that tend to spotlight high-profile liquidations. Compared with the same period of 2007, there was in fact a decrease in the turnover rate for large hedge funds in the database.

Funds focusing on structured credit securities make up only 0.6 per cent of the database, but accounted for 4.1 per cent of fund removals last month, reflecting the difficulties in credit markets and the relatively poor performance of these funds since last summer; the average structured credit focused fund has lost on average 4.29 per cent over the six months to the end of March.

Fixed-income arbitrage funds also experienced a higher turnover rate than a year ago, representing 1.9 per cent of the database but 5.2 per cent of turnover, up from just 1.5 per cent in the same period last year.

Funds focused on convertible bond-related strategies also experienced a disproportionate rate of removal, accounting for 1.3 per cent of the database but 4.1 per cent of turnover. The HFN Convertible Arbitrage Average is down 2.92 per cent over the first three months of 2008, slightly worse than the hedge fund industry as a whole.

By contrast, commodity- and foreign exchange-focused funds experienced lower turnover rates, making up 5.3 per cent of the database but only 2.1 per cent of the funds removed. This reflects the 8.33 per cent performance of the HFN CTA/Managed Futures Average in the first quarter, the benchmark's best-ever start to a year.

Although emerging market-focused hedge funds have suffered above-average losses so far this year, this has not been reflected in their rate of turnover within the database, which HFN says may indicate greater willingness on the part of investors to accept high levels of volatility in these funds. A year ago emerging market funds accounted for 5.2 per cent of database turnover.

HFN found that funds with legal structures domiciled in the US experienced higher turnover than those outside, representing 30.4 per cent of the database but 47.4 per cent of removals, and funds investing in Europe and Asia experienced lower turnover rates than their representation in the database.

Funds predominantly investing in Asian markets, 8.6 per cent of the database, accounted for 6.7 per cent of turnover, while funds investing in Europe, although 9.0 per cent of the database, represented 4.6 per cent of turnover. An exception was funds investing principally in Japan, which were 2.7 per cent of the database but constitute 4.1 per cent of removals.