Hedge Funds Are Expected
To Face a Shakeout in 2003
By JOY C. SHAW
DOW JONES NEWSWIRES
NEW YORK -- The hedge-fund industry's shakeout will result in hundreds of funds either closing or being integrated into large financial firms next year, according to hedge-fund tracking services.
The number of expected closings is unprecedented, as the industry gets hit by a lack of profitability and the difficulties of raising capital in the existing environment.
The number of hedge funds world-wide, according to Van Hedge Fund Advisors International Inc., has grown every year since 1988, when it started tracking data, to about 7,000 funds at the end of 2001. But George Van, the Nashville, Tenn., advisory's chairman, says that number will likely stay flat or even decline at year end due to the large number of expected closings in the U.S., he said.
Already this year, a dozen or so hedge funds have disappeared from radar screens. Mr. Van estimates anywhere between 500 and 750 hedge funds may be forced to close by the fourth quarter 2003.
Even though hedge funds in general performed better than mutual funds this year, many still lost money, a fact that bears more implications for hedge-fund managers than their mutual-fund counterparts. Unlike mutual funds, hedge funds are more lightly regulated and can take bigger risks for their institutional clients and wealthy retail investors.
Through September, the average U.S. hedge fund has fallen 3.6%. During the same period, the average stock mutual fund fell 25%, while the Standard & Poor's 500-stock index declined 28.2%, according to Van Hedge Advisors.
Charles Gradante, president and chief investment officer at Hennessee Hedge Fund Advisory Group in New York, says that aside from poor performance, many funds have faced difficulty raising enough money to stay afloat. "The trends we are seeing this year are a little disturbing in that we are seeing more managers closed down due to the inability to raise sufficient capital to sustain operating expenses, regardless of performance," he said.
Interestingly, the total value of investments in the hedge-fund industry continued to grow between 2000 and 2002. But most of the money has been from institutional managers such as pension and endowment funds, which tend to put money into larger hedge funds, Mr. Gradante noted. |
