Hedge fund launches on rise, but fees still falling

Last year was a case of swings and roundabouts for the $1.9trn hedge fund industry, with an increase in launches but continuing decrease in performance fees investors would pay.

Some 935 hedge funds began last year, ountnumbering the 743 that shut down, according to Hedge Fund Research.

New fund numbers were still far short of the nearly 1,200 launches in 2007, however, before the depth of the crisis.

The good news was the 743 fund liquidations in 2010 were also far fewer than the record 1,471 that threw in the towel in 2008.

Since losing 19% that year, the industry made 32.5%.

These gains dramatically cut the proportion of assets on which managers cannot charge performance fees to just 5%, according to a survey of UK-based managers by the UK’s Financial Services Authority.

The improvement came because managers must typically repair past losses before charging the levy on existing investors.

However, HFR noted the industry must now survive on lower average incentive levies – 18.95% of gains, compared to 20% in the past.

The Chicago-based data providers also noted the difference between the best and worst performing hedge funds narrowed “considerably” in 2010.

The 58 percentage points between top decile funds’ 43.2% gains from bottom decile’s 14.6% losses was half that of 2009, when the best funds’ investments doubled while the worst funds’ lost 62.4%.

However, the industry is not out of the woods yet. The FSA noted earlier this week 11% of the investments by UK-based managers remain impaired in some way.

Separately, HFR noted J.P. Morgan and Goldman Sachs are the top prime brokers, doing business for 29.3% and 19.7% of funds respectively.

J.P Morgan gained substantially in prime brokerage when JP Morgan Chase subsumed Bear Stearns’ business when it bought the bank during the credit crunch.

David Walker

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