The number of new hedge funds created in 2011 was the largest number since the financial crisis according to fund tracker Hedge Fund Research. The data analysis group said that 1113 new hedge funds had opened in 2011 which approaches 2007 levels of 1197. This news comes despite the lower performance of many hedge funds in 2011. Last year the average hedge fund lost five percent of its value and yet over one thousand new operations were brought to the market. Equity hedge funds which lost about eight percent last year on average accounted for one of the major increases. A total of 479 equity hedge funds were launched last year. The research shows that 270 new funds were founded in the last quarter of 2011, a quarter which saw 190 funds liquidated. The total number of funds liquidated last year was 775. This marked a moderate increase on 2010’s numbers which showed 745 liquidations.
The increase in the number of hedge funds in 2011 seems unusual at first glance given the poor performance of funds that year and the volatility of the markets. The prevalence of equity funds seems counterintuitive. The answer lies in the second most popular type of new opening, macro funds. In a year that saw more volatility in sovereign trading than any in recent memory 265 new funds were opened in this space. This is the highest number since HFR began tracking them in 1996. Hedge funds bask in increased risk and increased volatility. New funds employ different strategy to attempt to circumvent the risk and innovate to grow their value. This is the basis for the operations of so many funds and this is why there were so many new openings both in macro and equity funds. The process will continue and the number of liquidations may remain high but the funds with the best strategies will win out and refine their investment plans.
Hedge Fund Research is the global leader in the indexxing and analysis of hedge fund type operations. The group was established in 1992 and since then has kept databases on the functioning of hedge funds worldwide. The company is famed for its hedge fund analysis and ranking procedures which are widely used by investors and funds alike. The impact the financial crisis had on the birth of new hedge funds appears to have lessened and the new funds are diverse in their methods and strategies. The story of the hedge fund space revitalising and evolving itself should be inspirational to investors and should improve the state of the markets and the economy as a whole.
ValueWalk is not surprised by this news. We did not have raw data, but noted in an article two months ago that a source working at prime brokerage desk of one of the largest investment banks confirmed the spike in new funds. He noted that many new hedge funds were being seeded by their former bosses in hopes to carry on the older fund’s legacy. This is what Julian Robertson did with his ‘tiger cubs.’
Additionally, we spoke to many people who were laid off from their former employers, and launched hedge funds or research firms.