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Hedge fund liquidations accelerate in the third quarter, says HFR

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A record number of hedge funds liquidated in the third quarter of 2008, according to Chicago-based industry data provider Hedge Fund Research.

A record number of hedge funds liquidated in the third quarter of 2008, according to Chicago-based industry data provider Hedge Fund Research. HFR’s latest Market Microstructure Quarterly Industry Report indicates that 344 funds closed during the quarter, far exceeding the previous quarterly record of 267, set in the fourth quarter of 2006.

A total of 693 funds have liquidated over the first nine months of 2008, around 6.9 percent of the overall industry. This reflects an increase of more than 70 percent over the first three quarters of 2007, during which 409 funds liquidated.

A total of 117 new funds were launched in the third quarter, bringing the total for the year to 603, 90 fewer funds than were liquidated during the same period. The third quarter is the first period in which the industry experienced more liquidations than launches since HFR started tracking this data in 1996. HFR estimates the entire industry to comprise more than 9,700 funds at the end of October, including some 7,300 single-manager funds.

On an annualised basis, the current year is on pace for more than 920 fund liquidations, exceeding the previous calendar year record of 848 in 2005 and far surpassing last year’s total of 563. There were minimal discernable trends with regard to fund characteristics, as the distribution of liquidations was approximately proportional to the number of funds across strategies, regional investment focus and geographic location.

Quarterly liquidations of single manager funds were slightly higher in percentage terms than liquidations of funds of hedge funds, with an attrition rate of approximately 3.5 per cent of single manager hedge funds in the third quarter compared with just over 3 per cent for funds of hedge funds. However, the funds of funds liquidation total during the first nine months of 2008 already exceeds the highest annual total for closures of 156, also set in 2005.

‘The hedge fund industry is currently experiencing a structural consolidation that mirrors broader trends across the entire financial industry,’ says HFR president Kenneth J. Heinz (photo). ‘The combination of a sustained increase in asset price volatility with the decrease in liquidity has widened the differentiation between funds and increased the challenges for both funds and investors.’

The HFR report also notes that nearly 100 percentage points of performance separate the top and bottom deciles of hedge funds over the past 12 months, the widest gap between the best and the worst performing deciles since HFR began tracking fund dispersion. Fund of funds dispersion data shows that nine of the 10 deciles have returned losses over the past 12 months, an underperformance trend exceeding that of single manager funds.

HFR also notes that the hedge fund industry’s top three prime brokers handle more than 52 percent of the funds in the industry as a whole and more than 63 percent of total industry assets. The report also finds that in the most recent period, funds with the highest assets, shortest track records and lowest management fees outperformed their peers.

HFR’s data is based on more than 13,000 funds tracked historically by the firm, including more than 7,800 funds reporting to the firm as part of the HFR Database subscription product. Founded in 1993, HFR Group is a provider of hedge fund data, research, indexation and asset management products and services, including the HFRI and HFRX indices of hedge fund industry performance.

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