Hedge Fund Launches Spike in 2010

January 3, 2011

The pace of new hedge fund launches picked up considerably in 2010. In total, 260 new funds launched during Q3 alone, according to data from Hedge Fund Research and reported by Reuters. That outpaces the 201 new funds launched in the second quarter, and 224 funds launched in the last quarter of 2009.

All together, some 945 new hedge funds have thrown their hat into the ring in the last 12 months, the most since mid-year 2008. A number of factors are contributing to this development, says HFR.

First, the markets have improved, despite the uncertainty in Europe and slow pace of the U.S. economic recovery. Some hedge fund strategies, such as microcap or mortgages, are up from 16.6% to 21.4% YTD, according to data from Hedgefund.net. While the S&P 500 is up roughly 12.7% to date (source: CNN.com).

What’s more, pension funds and endowments appear to be more willing to commit new money to alternative assets such as hedge funds, to bump up their overall returns. The state of Wisconsin, for example, has announced plans for its first-ever investment of $1.4 billion into hedge funds.

“These trends are likely to continue as the hedge fund industry appeals to an increasingly wider, more global and more institutional investor base,” said Kenneth Heinz, president of Hedge Fund Research Inc.

The increased investment is prompting many new managers to set out on their own. This includes many proprietary traders who formerly worked at major banks, which are now scaling back their trading operations due to new regulations.

Early investors with these new funds may be able to strike a better deal with managers on fees and liquidity. Many new managers are charging less than the traditional 2% management fee and 20% performance fee to attract new capital. Shrewd managers will stress these and other differentiators in their hedge fund marketing efforts.

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