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Hedge fund managers shy away from launches when markets are under pressure

Hedge fund managers shy away from launches when markets are under pressure

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Hedge fund adoption has fallen to its lowest level since the 2008 financial crisis, as some managers struggle to make money in falling markets and suck up large companies like Millennium and Citadel Traders that might once have gone into business for themselves.

Global launches fell to 71 in the third quarter of last year, from 132 in the third quarter of 2021, according to data group HFR, according to the latest available data. This is the lowest level since the last three months of 2008, when 56 new funds were launched during the financial crisis.

“The months following periods of stress such as the global financial crisis and the strained market that brought about the end of quantitative easing have made it a difficult time to launch a new hedge fund,” said Donald Pepper, co-CEO of hedge fund Trium Capital and a former Goldman Sachs banker – although he expects an improvement this year.

The data comes at a difficult time for much of the $3.8 trillion hedge fund industry, with many traders grappling with sharp falls in stock and bond markets over the past year, offset by a sharp rise of inflation and steep rises in interest rates.

Initial figures from HFR show hedge funds are down an average of 4.4 percent over the past year, with equity managers including some of the Tiger Cubs – funds which can trace their origins to Julian Robertson’s Tiger Management – being hit hard by the big sell-off in valued tech stocks.

While some parts of the industry made big gains — including macro traders like Caxton’s Chris Rokos and Andrew Law, as well as many computer-controlled funds — other funds’ losses didn’t help attract investors to fresh money in what had been a troubled environment for a long time. According to HFR, the funds have suffered combined net outflows of $190 billion since the beginning of 2016.

Still, there have been a number of high-profile starts in recent years, such as Fifthdelta, founded by former Citadel traders in 2021, and General Industrial Partners, a new short-selling hedge fund envisioned by founders of Gotham City Research and Portsea.

But for many traders, the prospect of joining one of the large, multi-manager firms that employ dozens or even hundreds of different trading teams and often tie up investor funds for years is far more appealing than having to bear the high cost of hiring out-of-pocket one start a new company. According to Quentin Thom, co-head of perfORM Due Diligence Services, these costs have been ratcheted up by the coronavirus pandemic.

Marlin Naidoo, Global Head of Capital Introduction at BNP Paribas, said: “A key driver of the reduction in launches is the growth we have seen in the multi-manager space.”

Such companies have been among the most consistent performers in recent years. Ken Griffin’s Citadel, for example, was up 38 percent last year while rival Millennium Management returned 12.4 percent.

The performance of multi-manager funds and their ability to locate traders in low-tax locations like Dubai are among the factors that make them “now seen as a less risky, more lucrative and more flexible work environment than in previous years,” Thomas said Hennelly, director of executive search firm Paragon Alpha.

That “certainly contributed to why candidates are more inclined to join them than create their own fund,” he added.

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