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HFR Reports Record Hedge Fund Liquidations

by Phillip Morton, Investors

29 December 2008

A record number of hedge funds liquidated in the third quarter of 2008, according to data released recently by Hedge Fund Research (HFR), a leading source of hedge fund information and performance data.

Analysis compiled in the firm’s latest Market Microstructure Quarterly Industry Report shows 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 in 2008 through the end of the third quarter, or approximately 6.9% of the overall industry. This reflects a sharp increase of more than 70% over the first three-quarters of 2007, during which 409 funds liquidated.

There were 117 new funds launched in Q3 according to HFR, bringing the total for the year to 603, 90 fewer funds than were liquidated during the same nine month 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.

On an annualized basis, the current year is on pace for more than 920 fund liquidations, easily outpacing the previous calendar year record of 848, which occurred in 2005, and far surpassing last year’s liquidation 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 (FOF), with an attrition rate of approximately 3.5% of single manager hedge funds in the third quarter versus just over 3% for funds of hedge funds. However, the trend in funds of funds is significant because the FOF liquidation total during the first three quarters of 2008 already exceeds the highest annual total for FOF 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,” said Kenneth J. Heinz, President of Hedge Fund Research, Inc. “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.”

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