Hedge fund liquidations gain steam

Hedge fund liquidations outpaced hedge fund launches during the third quarter, offering more solid evidence that the weakened state of the global economy is taking its toll on the $1.6 trillion hedge fund industry. The 344 hedge funds that shut down during the three-month period ending Sept. 30 set a record both in terms of volume and for being the first-ever quarterly net loss in the number of hedge funds, according to Hedge Fund Research Inc. in Chicago. HFR has been tracking this kind of hedge fund data since 1996. The third-quarter liquidations broke the previous record of 267 fund closings during the fourth quarter of 2006. A total of 693 hedge funds have liquidated through the first three quarters of 2008, a 70% increase over the 409 hedge funds shut down during the comparable period last year. “The hedge fund industry is currently experiencing a structural consolidation that mirrors broader trends across the entire financial industry,” Kenneth Heinz, HFR’s president, said in a statement. “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,” the statement continued. As liquidations have continued to mount, fund launches have slowed. There were 117 hedge funds started in the third quarter, bringing the total for the first three quarters of the year to 603, according to HFR. On an annualized basis, 2008 is on pace for 920 fund liquidations, outpacing the previous calendar year record of 848, set in 2005. The industry saw 563 funds shut down in 2007. Through the end of the third quarter, HFR estimated, there were approximately 10,000 hedge funds and funds of funds still in business.