Fund of Hedge Fund Liquidations Rose to Record in First Quarter

Date: Tuesday, June 16, 2009
Author: Saijel Kishan, Bloomberg

Liquidations of funds that invest client money in hedge funds rose to a quarterly record in the first quarter, according to Hedge Fund Research Inc., as almost 200 closed following the December disclosure of Bernard Madoff’s $65 billion fraud.

Union Bancaire Privee, Banco Santander SA and Fairfield Greenwich were among the firms that invested money with Madoff. While Madoff didn’t run a hedge fund, the investigation of his Ponzi scheme raised questions from investors about the quality of the reviews that funds of funds performed on investments.

“Although risk aversion began to recede from historical levels in the first quarter of 2009, the structural consolidation which has been ongoing for several quarters continued to transform the landscape of the industry,” said Kenneth Heinz, president of Hedge Fund Research.

Liquidations of hedge funds fell 50 percent in the first quarter from the prior three months. They posted an average return of 0.7 percent in the first quarter, Hedge Fund Research data show.

About 376 hedge funds, or 4.1 percent of the total, shut down in the quarter. A record 778 funds closed in the last quarter of 2008, the researcher said.

Among the firms that closed funds was Deephaven Capital Management, the hedge-fund unit of Knight Capital Group Inc., which in January agreed to sell most of its assets to Stark & Roth Inc., based in St. Francis, Wisconsin.

The industry declined by 1,200 funds from 9,050 in the middle of last year, Hedge Fund Research said. Hedge funds lost an average 19 percent last year, the worst return since the researcher started tracking data in 1990.

Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets, bet on falling as well as rising asset prices, and participate substantially in profits from money invested.

About 150 funds started business in the first quarter, the highest rate since the second quarter of 2008, Hedge Fund Research said.

To contact the reporter on this story: Saijel Kishan in New York at skishan@bloomberg.net