Hedge funds: Liquidations up, but so are manager numbers
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Hedge funds: Liquidations up, but so are manager numbers

According to data from research company HFR, the number of hedge funds going bust is rising rapidly. In 2005 to the end of the third quarter an estimated 484 funds went into liquidation, 81.8% more than in the whole of 2004.

Market participants point out, however, that the increasing number of failures is a result of higher costs and fewer opportunities, rather than incompetence or fraud. Increasing regulation has put pressure on smaller managers that cannot afford the extra staff or administrative tools required to be compliant. At the same time interest from institutional investors is increasing. The growing client base is more willing to invest with managers that have larger operations.

Although liquidations are increasing in number, the number of managers is also growing. HFR’s universe grew to 8,532 managers by the end of the third quarter of 2005, up from 7,436 at the end of 2004. With more money chasing the same opportunities, some hedge fund managers cannot meet the returns required to be profitable.

Expanded offerings

As a result, one lawyer says he is seeing managers attempting to diversify the business to include financial services. “We’re seeing more managers expanding their offerings to use the knowledge that they have running a strategy,” he says. “So a merger arbitrage manager would be able to use skills to advise in an M&A event. Or a distressed manager could set up a reorganization consultancy.

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