' Welcome to the Dark Side: Hedge Fund Attrition and Survivorship Bias Over the Period 1994-2001', written by Harry Kat and Gaurav Amin of the University of Reading says that more than two in five hedge funds fail to survive for five years. The report says that only 59.5% of hedge funds around five years ago are still operating, and this attrition rate is increasing. Five years ago, 93.8% of funds survived until the end of the year; last year, the proportion dropped to 87.7%.

The main reasons, says the report, seem to be lack of size and lack of performance. Small funds do not generate sufficient fees to make managers' jobs worthwhile. Underperforming funds find it difficult to attract investors and managers do not earn performance fees from funds that generate poor returns.

Global macro funds have shown the highest attrition rate. This seems to relate to problems experienced during the Asian and Russian crises of 1998. The lowest attrition rate was in convertible arbitrage and event-driven funds but the authors say: "One should be careful not to read too much into these results as they appear to be heavily influenced by a small number of major events, which are unlikely to repeat themselves in the near future."