Hedge Fund Liquidations, Launches Slow In Second Quarter

Sep 16 2010 | 2:29pm ET

Fewer hedge funds went out of business in the second quarter, but fewer went into business as well, as investors show an increasingly marked preference for larger, more established firm.

A total of 177 funds—about 2% of the industry—closed their doors between April and June, the lowest level since the second-quarter of last year and a return to a pre-crisis rate of attrition. But only 201 new funds opened during the quarter, down 20% from the first quarter, Hedge Fund Research reports.

One of the reason so few new funds got off the ground was that investors put nearly all of the $23 billion in new money they invested in the asset class to with hedge fund managers with more than $5 billion in assets. Those largest funds now control some 60% of total hedge fund assets.

Even funds of hedge funds, that ever-benighted segment of the industry, is shrinking more slowly. Just 54 disappeared last quarter, the lowest number in two years, leaving about 2,100. Prior to the financial crisis, there were nearly 3,000 funds of funds.

“It is indicative of the fact that the industry is recovering from the financial crisis,” HFR President Kenneth Heinz told Bloomberg Television. “The risk tolerance that investors are continuing to harbor is coming back more slowly, but it is coming back.”

Fees charged by hedge funds have also declined, with 2 and 20 becoming less and less prevalent. In fact, while the performance fees remain close to their longtime standard at an average of 19%, management fees have dropped to a average of close to 1.5%.

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