February 08, 2007

Longer Lives for Hedge Funds

-- Pushpa Sathish, Staff Writer

We’ve read and heard a lot about the relatively short lifespan of hedge funds – they average three years in existence before closing up shop. But that trend is slowly fading away, says hedge fund consultant and index provider Hennessee Group. The attrition rate for hedge funds, that is, the rate at which they are liquidated, is an average of 5.2 percent since 1999. The last two years have seen a significant decrease in the number of hedge funds that wound up due to poor performance or an exodus of staff and managers – 6.2 percent in 2004, 5.4 in 2005, and 5.1 in 2006.

Hedge funds are opening their doors to institutional money, a move that will generate larger funds with more expensive infrastructure. The very existence of these influential funds will make it difficult for startup and smaller funds to survive, which means that fewer people will be rushing to launch their own funds without the necessary clout to endure the stiff competition, according to Hennessee.

Conclusion – The attrition statistics do not mean that the failure rate in the hedge fund world is much higher than that in other industries – Hennessee’s managing principal Charles Gradante sums up the situation.

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Mr Gradante's research on attrition rates are in line with my own empirical obsrvation.other hedge fund professionals have come out with numbers like 15% per year which if you do the math between growth rates and failire rates it doesn't make sense. The Hennessee group is in the ball park as far as I am concerned regarding this controversial subject.

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