Hedge Fund Launches in 2010
What Does 715+ Hedge Fund Launches in 2010 Mean?
The Wall Street Journal is pouring some cold water on those who were excited by the 715 new hedge funds launched in the first nine months of 2010. According to the Journal, we shouldn't be too optimistic because many of the launches were existing hedge fund managers opening new funds, not new managers, and it is still a difficult environment for new managers to launch hedge funds.
But would-be hedge-fund tycoons shouldn't get their hopes up. Granted, the climate is improving. The industry is seeing net inflows after two years of bleeding assets, with a strong uptick at the end of last year. Pension funds are increasing allocations. But many of last year's launches were new funds created by existing managers. For all but a handful of stars, starting a new firm is much tougher now than it was during the boom.
First, the demise of the fund-of-hedge-funds sector has deprived start-ups of the main source of seed capital. Fund-of-funds assets under management have fallen by a quarter in the wake of the Madoff scandal and investor concerns over the impact of double-layering of fees on returns. The bulk of new hedge-fund investment now comes from big institutions that typically lack the capacity to do due diligence on small start-ups and focus their investment on larger firms with longer track records and stronger balance sheets.
Second, barriers to entry and costs of doing business have risen. Hedge funds face new registration requirements with the Securities and Exchange Commission and greater reporting burdens under new European rules. New funds need at least $100 million in assets under management to be commercially viable and attract investor interest, compared with around $50 million a few years ago, according to people who advise hedge-fund start-ups. Source
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