Hedge Funds Reborn

Date: Wednesday, September 30, 2009
Author: Anita Raghavan, Forbes

Launches of new hedge funds set to rise for the first time since 2005.

LONDON -- Hedge fund managers (and would-be hedge fund managers) may finally have reason to celebrate this year -- new fund launches are on the rise. If they keep up at this pace, it could be the first year since 2005 to show some annual growth in new fund formations.

This is on the heels of 2,100 hedge fund failures since the credit crisis. That some managers are dusting off and trying again could be a sign that the smart money sees some opportunity in the markets. It might also be that funds that had posted huge losses closed down so that the managers could start with fresh records, resetting high-water marks so that they can collect performance bonuses without making up the money lost in 2008.

When Hedge Fund Research unveiled its second-quarter data earlier this month, all eyes were focused on the slowing number of hedge fund liquidations. What was little noticed were the hedge fund launches. Since 2005, they have been falling steadily from a peak of 2073 in 2005 to 659 last year. The slide appeared to be continuing in the first quarter when 148 new hedge funds were launched. But, in the second quarter, 182 new hedge funds were launched, just as the equities markets bottomed.

The rising launches are a "constructive development," says Ken Heinz president of Chicago-based Hedge Fund Research. "You are continuing to see risk tolerance and risk appetite improving from the historical lows at the end of 2008.”

To be sure, there are still more hedge funds shuttering their doors than opening them, with 292 going out of business in the second quarter alone, according to Hedge Fund Research. But there have been some notable launches. Among them: Tyrus Capital, with about $500 million in assets started by Tony Chedraoui, a former portfolio manager at Deephaven Capital Management and Roc Capital Management, the brainchild of Arvind Raghunathan, former head of Deutsche Bank AG ( DB - news - people )’s global arbitrage business. Roc Capital launched with about $1 billion in assets with half of that coming from Deutsche Bank.

Some hedge fund re-treads are testing the waters again. Reed Griffith who got flak last year for "gating" investors by suspending redemptions after a disastrous loss of 48% is sounding out investors for two new funds, a Convertible Opportunity Fund and a European Equity Opportunity Fund. (See "Bad Boys Of Hedge Funds.")

Things have changed for the new start-ups. During the boom years, the bar for raising capital kept rising; now it's lower, says Heinz. Instead of holding out to raise a hedge fund with $500 million in capital, would-be managers are satisfied with starting out with, say, $100 million instead.

That poses a big risk, others say, that this year’s rise could be a temporary blip. Many hedge funds are being set up with small sums on the order of $10 million to $20 million and if managers can’t raise more capital by next year, they are likely to fold as quickly as they launched.