Hedge fund graveyard: 693 and counting

Date: Friday, December 19, 2008
Author: CNN Money

A research group says 344 hedge funds were liquidated in the third quarter - a significant increase that represents 7% of all hedge funds.

A record number of hedge funds went bust during the third quarter, a report showed Thursday, as shaky markets and tight credit drove investors away from risky investments.

Hedge Fund Research, a Chicago-based information company, said the number of hedge funds liquidated in the third quarter rose to 344, which is more than three times the 105 liquidations in the third quarter of 2007. It's also 77 more than the previous record of 267 liquidations in the fourth quarter of 2006.

The data also showed that 693 hedge funds were closed in the first nine months of the year versus 409 in the same period last year. That's an increase of 70% and represents nearly 7% of all hedge funds, according to HFR.

"The hedge fund industry is currently experiencing a structural consolidation that mirrors broader trends across the entire financial industry," HFR President Kenneth Heinz said in a statement. Stock market volatility and a lack of available credit "increased the challenges for both funds and investors," he added.

Indeed, in the third quarter, the number of hedge funds closing shop exceeded the number of funds launched for the first time since HFR started tracking this data in 1996.

At this rate, hedge fund liquidations are on track to reach 920 for the full year, the report said. That would outpace the 563 liquidations last year, and could top the previous record of 848 in 2005.

This year has been brutal for many fund managers as the financial crisis has unfolded and investors have fled risky investments.

Hedge funds have been flooded with redemption requests in recent months as the crisis has exploded and investors have asked for their money back to cut losses or pay back debt.

The third-quarter was a particularly brutal, with the Dow Jones industrial average plummeting nearly 25% from October to November.

"Risk tolerance is at a historical low," Heinz said. "Investors are not even distinguishing between a fund that's up 10% and one that's down 10%. Both facing redemptions."