Hedge Fund Numbers On The Decline

November 11, 2002 (PLANSPONSOR.com) - As many 500 to 750 hedge funds may be forced to close by the end of 2003, according a Wall Street Journal Report.

The steady growth of hedge funds every year since 1988 may be coming to a halt, says George Van chairman of Van Hedge Fund Advisors International, Inc., a Nashville-based hedge fund advisory firm.  Van projects between 500 and 750 hedge funds to no exist by the end of 2003.

The Hennessee Group concurs and expects between 300 to 500 funds closing by the middle of 2003.

Even as hedge funds have outperformed mutual funds over the previous year – the average hedge fund has declined 3.6% while the average mutual fund has decreased 28.2% – hedge funds may be in for a decline in numbers.

The fact that hedge funds have lost money at all cuts into the amount of money raised from fees collected.   Unlike mutual funds, a down year for a hedge fund can often lead to that fund closing its doors.   “The majority of hedge fund compensation is directly related to performance. When a hedge fund is unprofitable for a year, it typically loses most of its fee income. So, in the current market, with about one-half of hedge funds being unprofitable this year, most will not receive the fees on which they depend to pay their expenses”, went on to say Van.

In addition to poor market performance, hedge funds are also hampered by the inability to raise funds and the current climate of consolidation. Smaller funds – those with assets between $10 million and $50 million – are most at risk here.  

These smaller funds depend more than their larger counterparts on high net worth individuals to provide financing and therefore the ability to maintain operating expenses. When the funds get low, smaller funds either close their doors, or are bought up by traditional financial institutions eager to get into the hedge fund market, such as FleetBoston or Wells Fargo.