Hedge fund liquidations slow, managers earn less

Date: Friday, September 18, 2009
Author: Svea Herbst-Bayliss, Reuters

*Hedge fund liquidations drop 22 pct in Q2

*More managers set up in Q2 than Q1

*Incentive fees drop for a third consecutive quarter

Hedge funds are going out of business less quickly this year than last year, according to data released on Thursday that offers fresh evidence of a recovery in the $1.4 trillion industry.

But at the same time hedge fund managers are earning lower incentive fees and starting new funds at a slightly slower pace, indicating that last year's disastrous results have not been completely forgotten.

According to Hedge Fund Research (HFR), 668 funds liquidated in the first half of this year, marking a slower pace than in 2008 when a record 1,471 funds shut down during the entire year.

As financial markets improved this year, the pace of liquidations also slowed. In the second quarter, 292 funds went out of business, 22 percent less than the 376 funds that shut down in the first three months of the year.

The researchers also reported that more managers set up funds in the second quarter -- 182 -- than in the first quarter when 148 new portfolios were launched.

The numbers paint a rosier picture for the $1.4 trillion industry after it was battered last year.

Funds are on course to report their best returns in a decade in 2009 only months after having reported their biggest-ever losses in 2008.

In the first eight months of 2009, the average hedge fund gained 17.3 percent as financial markets improved and evidence mounted that the global downturn would end soon. In 2008, the average lost 19 percent.

Improved returns are a main reason why funds are shutting down at a slower pace, industry analysts and investors have said. Another is that investors are pulling out less money now than the they did last year when returns were poor. Data from Barclayhedge show that investors put $8.3 billion into hedge funds in August, after pulling billions out in July and June.

Still 2009 has not been without prominent failures.

Arthur Samberg, whose Pequot Capital Management long ranked among Wall Street's most profitable partnerships, closed down his firm in May. Industry stars William von Mueffling and Timothy Barakett also told investors they were shuttering certain portfolios.

Also the HFR data illustrate that hedge fund managers are earning less and that managers are more cautious in setting up new funds at a time investors demand more rights to pull out their money fast if returns should start to sag.

Average incentive fees charged by manager dropped for a third consecutive quarter to 19.18 percent.