Hedge funds: it's survival of the fittest as record numbers close

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A record number of hedge funds are being liquidated and the rate of start-ups has slowed dramatically, according to new research.

The quarterly performance data from Chicago-based Hedge Fund Research will stir fresh concern about an industry that some fear has become overcrowded after a run of meteoric growth. Since 2005, 1,071 funds have been liquidated, while the launches of new funds through the first half of this year is less than 50 per cent of the level in the same period last year.

"For new funds to get off the ground, it is harder now than it has ever been," said Peter Astleford, a lawyer at Dechert who works in fund formation. "Seven or eight years ago, I might have spent 80 per cent of my time on start-ups - now it's 10 per cent."

As the industry has matured, institutions have become keener to put their money with established firms showing long track records. That has made it harder for newcomers to attract capital, Mr Astleford added.

Hedge funds have become increasingly aggressive in their pursuit of returns. The Children's Investment Fund, for example, has been a central player in the European stock exchange mergers, and Appaloosa Management is one of the key players in the bankruptcy of Delphi, America's largest car parts maker.

But overall fund performance has slumped. So far this year, the HFRI fund-weighted index has produced a 6.9 per cent rate of return, which lags well behind returns from the previous three years.

"There is no doubt that making money is tough in these markets," said Toby Hampden-Acton of Thames River Capital, a hedge fund that manages around $8bn (£4.3bn). " You've got more and more people in the industry chasing the same profit opportunities."

There are now close to 9,000 funds managing more than $1.2 trillion globally.

The industry has also been rocked recently by risky bets going wrong. Both Vega Asset Management and Amaranth Advisors have seen the value of their funds plummet as a result.

Increased regulation is also on the way. The Financial Services Authority will publish a consultative paper later this month that will introduce stricter rules governing hedge fund activity. The increased compliance burden could lead to further fund closures, sources said.

Some market sources, however, said investor interest was still rising and that the liquidations reflected a natural maturing in which smaller or underperforming funds are weeded out.