The
number of hedge fund closures reached 232 in the first three months of
this year. Let's rewind and look back a bit comparing this figure with the first three months of
2010, the rate of liquidations were 192 in the second
quarter, according to data from Hedge Fund Research.
A very fruitful research paper was borne in 2004 in the Fall edition of the Journal of Portfolio Management by Alex Grecu, Burton Malkiel and Atanu Saha. They found an inverse relationship between death of hedge fund and its age. In case, the hedge fund survived first few years it would live its life. The chart below shows the lifespan of hedge funds in the widely quoted TASS hedge fund database. (Note: funds that were still alive by April 2004, the date of the study, were treated as having a “duration” equal to their age by that date).
The data was transformed into maximum likelihood of failure and found the rate to start decreasing from Year 5 which is about 12% chance of failure on an annual basis. The same story goes with what has happened in the mutual fund industry where failure rate decreases from year 10 onwards.
“Investors are concerned about small and medium-sized firms that have small operations, and are not willing to invest,” said Kenneth Heinz, president of HFR. “Larger ones are more capable of handling regulatory requirements. They have an established department for compliance [and although] it is an increased cost they can handle it.”
The industry is seeing some of the big hedge funds growing much bigger. They are replicating the true story of too big too fail. Is this industry becoming oligopoly where its too hard to enter and exit is smoother?
In the coming post I would be discussing about the strategies that hedge fund followed and how the industry is going to be in emerging markets like India where it has just started.
A very fruitful research paper was borne in 2004 in the Fall edition of the Journal of Portfolio Management by Alex Grecu, Burton Malkiel and Atanu Saha. They found an inverse relationship between death of hedge fund and its age. In case, the hedge fund survived first few years it would live its life. The chart below shows the lifespan of hedge funds in the widely quoted TASS hedge fund database. (Note: funds that were still alive by April 2004, the date of the study, were treated as having a “duration” equal to their age by that date).
The data was transformed into maximum likelihood of failure and found the rate to start decreasing from Year 5 which is about 12% chance of failure on an annual basis. The same story goes with what has happened in the mutual fund industry where failure rate decreases from year 10 onwards.
“Investors are concerned about small and medium-sized firms that have small operations, and are not willing to invest,” said Kenneth Heinz, president of HFR. “Larger ones are more capable of handling regulatory requirements. They have an established department for compliance [and although] it is an increased cost they can handle it.”
The industry is seeing some of the big hedge funds growing much bigger. They are replicating the true story of too big too fail. Is this industry becoming oligopoly where its too hard to enter and exit is smoother?
In the coming post I would be discussing about the strategies that hedge fund followed and how the industry is going to be in emerging markets like India where it has just started.
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