Hedge funds launches pick up pace in Q3: report

Date: Thursday, December 16, 2010
Author: Svea Herbst-Bayliss, Reuters

Hedge funds look hot again.

Encouraged by strong capital flows and investors' new taste for riskier assets, hedge fund launches picked up the pace with 260 new portfolios launched during the third quarter, data released on Wednesday by Hedge Fund Research Inc. show.

This marks an increase from the 201 new portfolios that were started in the second quarter and the 224 funds that began operations during the third quarter of 2009, HFR said.

Conditions have improved so significantly since the financial crisis that a new highpoint was reached.

HFR reported that 945 new funds were launched in the last 12 months, marking the largest number of new funds started in a 12-month period since the period that ended after the second quarter of 2008.

Even though many prominent hedge funds lost money in the first months of 2010 because of volatile markets, Europe's growing debt crisis and fears that the U.S. economy is not recovering as quickly as many had expected, returns have picked up since then. The average hedge fund gained 7 percent through November, outpacing the Standard & Poor's 6 percent gain.

These numbers suggest that it is easier again for traders and portfolio managers to set off on their own as hedge fund managers now that pension funds and endowments are willing to commit new money to alternative assets like hedge funds.

For example, the state of Wisconsin's roughly $70 billion pension fund, one of several newcomers to the industry, plans to make its first ever hedge fund investments by selecting managers early next year to invest roughly $1.4 billion.

"These trends are likely to continue as the hedge fund industry appeals to an increasingly wider, more global and more institutional investor base," said Kenneth Heinz, president of Hedge Fund Research Inc.

This year a number of prominent managers have set off on their own, including Andrew Hall, a former Citigroup energy trader who launched his Astenbeck Capital, and several Goldman Sachs alumni, including Mark Carhart who launched the Kepos Alpha fund.

But analysts cautioned that the industry is nowhere near its heyday where there were few barriers to entry and roughly 1,400 funds were set up, on average, every year between 2002 and 2007.

This means that hedge fund managers who were once able to dictate terms to investors may now have to be more flexible on fees and liquidity terms. HFR found that the days of managers charging a 2 percent management fee plus a 20 percent performance fee may be gone with the average newcomer now charging a 1.6 percent management fee and a 19 percent performance fee.

Still, another good sign for the industry may be that the pace of liquidations is also falling. HFR, which tracks performance and flows in the hedge fund industry, said the third quarter marks the fifth consecutive quarter in which hedge fund launches have outpaced liquidations. In the first nine months of 2010 585 funds shut down, compared with 858 having shut down during the same time a year earlier.