Hedge Fund Closures in 2008 ~ market folly

Tuesday, March 24, 2009

Hedge Fund Closures in 2008

These markets have been unforgiving and have taken down many hedge funds, including some pretty prominent names. The recession, credit crisis, and overall market tankage lead to record redemptions in 2008. Here are some of the prominent names that the crisis sucked into the abyss: Ospraie Mangement, Drake Management, Peloton Partners, Okumus Capital, Ascot Partners, and Gordian Knot's Sigma Finance Fund. Overall, more than 1400 hedge funds were forced to closed, with nearly half of those coming solely in the fourth quarter of 2008. Courtesy of Dealbook, we see Absolute Return magazine's top 10 closures this past year: Fairfield Greenwich, Drake, Citigroup's Old Lane, D.B. Zwirn, Tontine's 2 funds, Ospraie, Highland Capital Management, Peloton, Tremont Group, and Kingate Management.

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And, while there may have been a lot of closures in 2008, new hedge funds are still opening up. There were, however, fewer new hedge fund starts last year than in years past. In fact, it was the lowest amount opened in 8 years. We've covered some of the notable start-ups including David Stemerman's Conatus Capital (ex-Lone Pine) and Anand Parekh's Alyeska Investment Group (ex-Citadel). Additionally, we've seen an emerging pattern of prominent funds starting new funds in an effort to still attain management and performance fees. This is, of course, due to the fact that some of their flagship funds have suffered such large losses that it would take quite a while before they start earning performance fees again (notably, Citadel). So, there are definitely new funds hitting the scene. But, at the same time, a Darwinian process is underway as the strongest survive and the weak die off. In the end, its only natural and its a healthy cleansing of the system. Get rid of that fluff.

Its also interesting to note that many are expecting another wave of hedge fund withdrawals as the market has continued to slide throughout 2009. Bloomberg had an article out recently stating that hedge fund giant DE Shaw has had more requests for withdrawals recently than it did for Q4 last year. (See some of DE Shaw's recent portfolio activity here). Jana Partners, a hedge fund ran by Barry Rosenstein that we've tracked on the blog before, has been faced with an increased level of redemptions (notably 20-30% of assets). Jana has been forced to set aside hard to sell assets in an effort to meet these massive redemption requests. We've covered some of their recent portfolio activity here and here. This just goes to show that no one is safe in this environment because everyone is in dire need of capital. This all after the fact that hedge funds lost around $11 billion in February. Also, fun fact: from June to December, hedge fund losses due to market losses and redemptions totalled $400 billion, according to Eurekahedge.

Back in the beginning of October, we wrote a piece entitled 'Let the Bloodbath Begin: Hedge Fund Redemptions.' While we would like to think that the worst of the redemptions is over (due to the massive panic in November), there undoubtedly will still be some further ripples in the industry. Whether or not those ripples become as large as the initial tidal wave remains to be seen.

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