For Hedge Funds, 2002 Will Be Record Year for Failure
Tue, 24 Dec 2002, 3:59am EST
London, Dec. 24 (Bloomberg) -- This year will be the worst
for the hedge-fund business in almost a decade as slumping stock
markets dented performance and sparked a record number of
closures, consultants and academics said.
A fifth of the 1,797 hedge funds tracked by Tremont Advisers
Inc. at the start of 2002 stopped reporting their results by the
end of October, and most of those funds shut, the consultant said.
In the past eight years, less than 4 percent of funds ceased
providing returns to Tremont.
The increase in liquidations corresponds with a slowdown in
new investments and deteriorating returns. The biggest funds to
close include offerings from New York-based Lipper & Co. and
Beacon Hill Asset Management LLC of Summit, New Jersey.
``This year shows the whole hedge fund story was a bit too
good to be true,'' said Harry Kat, associate professor of finance
at University of Reading in England. ``This may slow new
investment in the industry or stop it completely.''
The $600 billion business pulled in a net $17 billion in the
first nine months of this year, down from $31 billion in 2001,
Tremont reported.
Dwindling Returns
The slowdown comes in part because hedge funds, which are
designed to make money whether markets rise or fall, haven't
managed to produce strong returns.
Through November, these portfolios for wealthy investors and
institutions climbed 2.5 percent, on average, according to Morgan
Stanley. While that's better than the Standard & Poor's 500 Index,
which dropped 18.5 percent in the same period, the return was
lower than a U.K. bank would have paid on a savings account.
The weak performance will likely make raising money from
investors more difficult, increasing the number of funds that have
to shut, said Kat.
More than 800 funds may close by the end of the year, said
Oliver Schupp, president of CSFB/Tremont, a joint venture between
the hedge fund consultant and Credit Suisse Group. The majority of
closures have been small funds that didn't raise sufficient money
or generate enough fees, Schupp said.
The funds that lost money this year have it particularly
tough. Hedge funds generally charge about 20 percent of any profit
they make, yet if they lose money, they don't charge clients until
they earned back that cash.
The funds tracked by Tremont have to jump an average of 12
percent before they can start charging performance fees again.
Without those fees, many funds can't survive, Schupp said.
Smaller Funds
The $14 million White Mountain European Fund Ltd. closed this
month. Henderson Global Investors Ltd., Robeco Groep, Rourke
Capital Management Ltd. and Bank Sarasin & Cie. also shut funds
that failed to attract enough investors.
``We really couldn't afford to wait another year or two for
better times,'' said Kevin Doyle, who ran White Mountain with
Sarah Caygill from Geneva. ``There will always be room for small
boutiques in the hedge-fund industry, but there will be a lot less
of them.''
A few larger hedge funds also collapsed this year. Beacon
Hill, which specializes in mortgage-backed securities, was sued by
the Securities and Exchange Commission because it failed to
disclose losses of $400 million between July and September.
Lipper & Co., an investment firm run by former New York City
deputy mayor Kenneth Lipper, shut its convertible bond funds after
losing 45 percent of assets in 2001. Lipper's firm had initially
told investors the funds made a modest amount of money last year.
``These failures do the industry harm by showing potential
investors very clearly what can happen,'' Kat said. ``Within 10
months this year, a lot of the stereotypes about hedge funds were
proved right.''
Fewer Startups
The struggles of hedge-fund managers have begun to discourage
others from joining the industry. Freeman & Co., a U.S.
consultant, counted nine hedge-fund startups in the third quarter,
down from a record 76 in the fourth quarter of 2001.
Fewer new entrants and more managers dropping out may improve
the future performance of the industry as only the most talented
investors will be left.
``There's a shake-out going on,'' said White Mountain's
Doyle. ``That's good for the industry.''
The following is a table showing the number of funds that
stopped reporting performance figures to Tremont's Tass database,
the number of funds that were reporting at the beginning of each
year and the percentage of funds that closed.
While the majority of funds that stop reporting to Tremont
shut down, some managers stop supplying data because they've
raised enough money and don't need publicity anymore,
CSFB/Tremont's Schupp said.
Year//
No. of Funds that stopped reporting at end of year//
No. of funds reporting start of year//
Percentage that stopped reporting at end of year
*2002 319 1,797 17.8%
2001 59 1,641 3.6%
2000 21 1,439 1.5%
1999 26 1,217 2.1%
1998 20 1,023 2.0%
1997 10 825 1.2%
1996 8 644 1.2%
1995 1 500 0.2%
1994 0 366 --
*For this year, the figures are for the 10-month period ended Oct. 31.
Source: Tremont Advisers
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