Easier to Start a Hedge Fund, Harder to Stay in Business

June 20, 2011

More managers are starting hedge funds in 2011, but a greater number are also closing their doors, reports Reuters. Citing data from Hedge Fund Research, they report 298 new funds were launched in the first quarter of this year, compared to 220 during the fourth quarter of 2010. However, 181 hedge funds closed their doors in the same first quarter.

The article attributes the flood of new hedge fund launches to the number of top traders striking out on their own, due to new regulations limiting the big banks’ trading operations. A number of top traders from Goldman Sachs, as well as executives from PIMCO and Citadel and other firms have set out on their own.

However, a shift in the source of most of the new capital for hedge funds is putting increased pressure on these newer, smaller, start-up funds. Twenty years ago a sizeable portion of investors may have been wealthy individuals and family offices. Today, the major source of new capital comes from big institutional investors, pension funds and endowments.  These big institutional investors tend to prefer bigger, more established funds with greater transparency and compliance systems in place. This is making it harder for newer funds to reach the critical mass of $500 million to $1 billion in assets to run a profitable fund.

One such start-up fund that appears to have reached that threshold is the Taylor Woods Master Fund Ltd, a Greenwich, CT-based commodity hedge fund launched by former Credit Suisse banker George “Beau” Taylor. According to an article in the San Francisco Chronicle, Taylor Woods Master Fund received an injection of roughly $150 million from the Blackstone Group LP in 2010, and has now grown to more than $500 million.

George Taylor was the former head of global commodity proprietary trading at Credit Suisse AG. He co-founded the fund with Trevor Woods, who used to head global energy proprietary trading at Credit Suisse. Taylor started his career as an energy trader at Merrill Lynch & Co.

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