Further confirmation of hedge fund woes

Date: Friday, March 20, 2009
Author: Jonathan Ratner, Financial Post

Hedge fund closures in the United States rose to a total worth of US$84-billion in 2008, with Bernie Madoff feeder funds contributing a big chunk to that record figure.

More than 200 hedge funds or fund families shuttered or began to liquidate last year, according to Absolute Return magazine, a unit of HedgeFund Intelligence. The combined asset value at the height of their success is four-and-a-half times the US$18.7-billion once managed by the 48 American funds that closed in 2007.

Madoff feeder funds accounted for more than US$16-billion, or almost 20%, of the total assets involved in 2008 closures. Three of the top ten funds that shut down last year were Madoff feeder funds, including Fairfield Greenwich Group’s Fairfield Sentry Fund, the biggest casualty with an estimated US$6.9-billion in losses.

Absolute Return also noted that the number of closed or liquidating funds would likely have been much higher if so many hedge funds had not suspended redemptions or placed loss-making or illiquid positions in “side-pockets” or special vehicles.

Drake Management, with US$4.7-billion, was the largest firm unrelated to Madoff that decided to shutter. It ranked second among the top ten hedge fund closures in 2008.

In the fourth quarter, 788 funds liquidated with record investor withdrawls of more than US$150-billion, according to Hedge Fund Research. That more than doubled the previous quarterly record of 334 set in the third quarter. In 2008, it said the total number of liquidations was 1,471, a more than 70% increase from the prior year.

The fourth quarter also saw a sharp decline in the number of new funds launched. Just 56 emerged versus 117 fund launches in the third quarter. However, 2008 saw 659 in total, still well above the record low of 328 in 2000.

“After years of steady growth, 2008 was a record year for hedge fund liquidations, reflecting in part the transitions occurring across many aspects of the overall financial industry, as well as the substantial performance dispersion between hedge funds,” said Kenneth J. Heinz, president of Hedge Fund Research. “As the industry evolves to suit investor demand, trends in strategy preferences, service providers, disclosure and transparency are likely to shape the industry landscape for the foreseeable future.”