Hedge funds to consolidate?

Two articles from Euromoney Online:

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Fewer, But Larger, U.S. HFs Up In 1H08

Jul-09-2008 (Source)

The number of hedge funds launched in the U.S. in the first half of the year may have dropped 50%, but the ones that are being created are amassing more money.

A survey by Absolute Return magazine showed that, while there were only 35 new launches in the Americas thus far in 2008, those funds took in $19.5 billion. In the first half of 2007, 72 funds were created and amassed $14 billion.

Five funds took in more than $1 billion so far this year, with Goldman Sachs Group Inc.’s (GS) GS Investment Partners, an equity long/short fund, taking in $ 8.1 billion. Goldman Sachs also received $1.1 billion from investors for its Mortgage Credit Opportunities fund. As such, the two funds took in 41% of investments in new Americas hedge funds.

The second-largest launch came from Conatus Capital Management, whose Conatus Capital Partners fund brought in $2.3 billion.

The hedge-fund industry is currently estimated at $2.65 trillion, with some 10,000 funds, but confidence is waning along with the economy, and some funds have faced difficulty recently. Investors are demanding ever-higher returns for the fees they pay to be in the funds, and as such new money flowing into hedge funds continues to decline.

Feeling the brunt of it are smaller hedge funds, including top performers. Only 1,152 new funds were launched globally in 2007, down almost 50% from a 2005 peak, according to Hedge Fund Research Inc. Because so many funds closed last year or merged into others, the business expanded by just 589 funds overall, the smallest increase in six years.

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Bigger May Be Better As Minor HFs Quit

Jul-09-2008 (Source)

Bigger may be better for hedge funds at a time the $2 trillion (1 trillion pound) industry’s smaller players face tough choices of either merging or being forced out of business, reports Reuters.

In the first six months of 2008, more than a dozen smaller funds have already agreed to let larger players own a piece of them, and investors and managers expect that pace to quicken.

Man Group, the world’s largest publicly traded hedge fund group, has taken stakes in Ore Hill Capital and Nephila Capital, while Goldman Sachs’ Petershill unit has taken stakes in Capula Management, Claren Road Asset Management and Trafalgar Asset Managers.

“What we are finding is that managers of varying sizes are either merging with or selling a stake in their businesses to larger institutions,” said Ron Geffner, who works with hedge funds as a partner at law firm Sadis & Goldberg. “And in many cases the primary reason is to gain access to better infrastructure and distribution.”

While many hedge funds once operated with only a few people out of a basement or garage, bigger investors who have helped double the industry’s assets to $2 trillion in the last three years are demanding more for their money.

Risk management, legal departments and top-notch back office operations are must haves for big name investors like the Massachusetts state pension fund, trustees and fund officials said. That fund plans to put more money into hedge funds in the months ahead.

For smaller funds managing only a few million dollars these types of costs can put them out of business very quickly, several small fund managers said.

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