GLOBAL - The perfect storm battering hedge funds, of looming regulation worldwide and political vilification in Europe, has not deterred aspiring managers from launching products, as start-ups outnumbered liquidations in the fourth quarter of last year.
Analysts Hedge Fund Research (HFR) estimated 230 funds launched while 165 liquidated between September 30 and December 31. This continued the trend of the previous quarter, when launches outnumbered closures for the first time since the start of the credit crunch.
However, over a 12 month period, more funds shut down than opened up in both 2009 and 2008.
Fraser McKenzie, managing partner at Swiss-based hedge fund 47 Degrees North, said many managers were still getting going and, while the risks of investing in young funds could be greater, so too were the potential rewards.
The 27% rebound in equity markets last year played a role in one in every 10 funds doubling its money, while the bottom decile lost 16.5%. The year before, the top decile gained 40.9%, while the bottom decile fell 62.4%.
Rickard Lundquist, portfolio strategist at SEB, said last year was a good year for "directional funds we view as lower quality. Recovery of the markets enabled them to generate returns by following markets upward, what are called ‘beta returns'".
Allocators will face a harder time picking funds this year, as Lundquist added greater regulation mooted in the US and Europe could limit funds' ability to make healthy returns, and markets may not lift all boats as kindly as they did in 2009.
New managers are having to live off lower fees, said HFR.
The average performance-based fee for funds launched in 2009 was 17.6% - well below the historical 20% that Fortune magazine back in 1970 said lay behind why "so many money managers have been inspired to start hedge funds".
Overall the $1.5trn industry now retains 19.2% of its fresh gains as a fee, compared to 19.3% a year ago.
Managers are also generating returns on lower leverage, with about 40% of managers using none at all, while about 52% borrow one to two times their investment capital to invest further in markets.
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