15% of hedge funds closed in ’08

Date: Thursday, March 19, 2009
Author: Gulf-Times.com

A record 778 hedge funds liquidated during the fourth quarter, capping a year that saw financial markets melt down and investors yank $150bn of their money at the end of 2008, Hedge Fund Research said yesterday.
The ranks of hedge funds were more than decimated as 1,471 hedge funds closed down last year, or nearly 15% of all funds, HFR said. More than 275 funds-of-hedge funds were liquidated in 2008, also a record.
Meanwhile, 56 new funds were launched during the quarter, contributing to 659 that opened their doors throughout 2008.
On a net basis, the total number of hedge funds fell by 8% to 9,284 last year, the Chicago-based firm said.
Last year was a disaster for hedge funds, lightly regulated investment pools that are the exclusive playground of big institutions and wealthy families. As markets tanked, investors withdrew money and triggered a cycle of forced selling that put more pressure on markets.
The number of liquidations more than doubled the previous quarterly record of 344 set in the third quarter. Last year’s liquidations marked a 70% increase from the previous annual record set in 2005.
Among other findings, HFR said the credit crunch that roiled Wall Street’s biggest banks did not loosen their grip on the prime brokerage business: the top three prime brokers still controlled 62% of hedge fund industry capital.
Last year also was a record for disparity in performance, with about 100 percentage points separating the top 10% of performers from the bottom 10%.
The Wall Street Journal meanwhile, said some of the billions of dollars the US government paid to bail out American International Group (AIG) stand to benefit hedge funds that bet on a falling housing market.
The documents showed how Wall Street banks were middlemen in trades with hedge funds and AIG that left the insurer holding the bag on billions of dollars of assets tied to souring mortgages, the paper said, citing people familiar with the matter and reviewed documents.
AIG has put in escrow some money for at least one major bank, Deutsche Bank, whose hedge fund clients bet against the housing market, the paper said, citing a person familiar with the matter.
The money will be released to the bank if mortgage defaults rise above a certain level, it said.
Investment banks such as Goldman Sachs Group and Deutsche Bank sold financial instruments to hedge funds letting them bet that mortgage defaults would rise, the paper said, adding that the instruments were credit default swaps – a form of insurance that pays out in the event of a debt default.
From mid-September to the end of last year, AIG and the government paid $5.4bn to Deutsche and $8.1bn to Goldman under credit default swap contracts the insurer had written, the paper said.
It is not known which hedge funds made those bets with specific banks, the paper said, adding several large funds made big, ultimately profitable, wagers that mortgage defaults would increase.
An AIG spokeswoman declined to comment to the paper. A spokesman for Deutsche Bank told the paper that the bank’s “exposure to AIG was well-collateralised and hedged.”
A Goldman spokesman also told the paper that the firm’s exposure was collateralised and hedged.
AIG, an embattled insurance giant that has received federal bailouts totalling $173bn and is now paying $165mn in employee bonuses, is at the heart of a global financial crisis that US President Barack Obama is trying to address with plans for trillions of dollars in spending.