Hedge Funds Try To Cope

The hedge fund industry has known little but growth, until now. At the 2008 Markets Media Global Financial Summit in New York City in December, Sam Hocking, co-global head of sales at the prime brokerage for BNP Paribas, speculated that up to 3,000 hedge funds that were trading in 2008 will be gone by the end of 2009. A recent report by Citigroup speculated that hedge fund assets could fall below $1 trillion.

We know that funds flame out from time to time, but investors have always lined up to buy shares in new ones. Maybe not anymore.

Hocking says that BNP Paribas (other-otc: BNPQY.PK - news - people ) clients are showing more and more interest in setting up private accounts to invest with private investment managers. They're no longer as willing to play the "limited partner" role, which can really be summed up as: putting up the money and then being quiet about it.

The Bernard Madoff scandal, coupled with an already rough 2008, has led to record liquidations. Hedge Fund Research, a hedge fund data outfit, records that 693 funds liquidated through the third quarter of 2008, up 70% as compared with the year prior. In total, 6.9% of all hedge funds closed their doors through the third quarter of 2008.

Losses are accelerating. The third quarter saw 344 hedge funds close their doors, another record. The prior previous record for a bad quarter had been 267 funds closed, which took place in the fourth quarter of 2006.

HFR is not quite sure just yet how bad the Madoff scandal will be. "Hedge Fund Research, Inc. is engaged in dialogue with funds which may have been impacted by exposure to Madoff Securities, in an effort to appropriately reflect any impact this exposure may have had on these funds," it wrote on its Web site.