There were 86 launches of hedge funds with $50 million of assets or more, raising $31 billion in 2006. In 2005, there were 91 launches raising more than $34 billion.
Shingles
"Costs of starting up have increased, and now investors are more choosy and don’t need to bet on a start-up, so everyone is finding it harder to go and hang up a shingle," says Martin Cornish, partner at law firm Katten Muchin Rosenman Cornish in London.
"We’re seeing a lot less people coming through our doors looking to start up," he adds. "A couple of years ago we would see two, three, four groups a week, and now we tend to see one group interested in starting every couple of weeks or so."
Rami Habib is CEO of KTH Fund Management. His firm, part of Kyte Group, helps hedge fund start-ups, principally by investing in the funds, investing capital towards start-up costs, and providing the infrastructure. Habib agrees that the number of successful hedge fund launches is decreasing. "Last year alone we saw more than 250 groups of traders looking for help starting up a fund. That sounds like a lot, but of those we are only working with five to prepare to launch. We are quite fussy and have high standards. That is not to say that some of the others have not succeeded in launching on their own or through other seeders but I would say the number of people with true potential to launch is decreasing."
Habib cites several reasons why the number of launches is decreasing. "Last year was a bit lacklustre for hedge funds in general and many of the $1 billion-plus funds didn’t perform. Then there were the blow-ups on the commodities side. It’s been a difficult 12 months for sure.
"I think also, however, the good-quality traders are becoming comfortable where they are, be that a prop desk within a large institution or at a multi-strategy fund. Traders at prop desks are getting better remunerated and are nervous about leaving to join the funds world as many funds are failing to get off the ground. They are realizing that it is not easy to manage a fund business, especially from an operational point of view. And the larger multi-strategy funds are getting bigger and are keen to attract and retain good traders. Some of the compensation packages we hear about can be quite compelling. Our problem is that we have capital but are looking for the right traders to allocate it to."