Hedge funds: They're back!

By David Ellis, staff writer


NEW YORK (CNNMoney.com) -- After two incredibly turbulent years defined by high-profile blow-ups and staggering losses, the hedge fund industry appears to be expanding once again.

At the end of last year, there were about 6,800 hedge funds in existence, according to industry tracker Hedge Fund Research. That's down from a little more than 7,600 at the industry's peak in 2007.

But new launches outpaced liquidations during the second half of 2009, according to HFR. Anecdotal evidence seems to suggest that trend will continue.

"We are seeing a significant amount of fund formation," said Philippe Teilhard de Chardin, global head of prime brokerage at Newedge, a Paris-based brokerage firm.

In fact, hardly a week goes by these days without mention of an existing fund company trotting out a new hedge fund offering or news of some ambitious financier hanging out their own shingle.

Last month, reports surfaced that activist investor and founder of Pirate Capital Tom Hudson was looking to launch a new hedge fund called Doubloon Capital, which would focus on distressed companies.

Wall Street also sat up and took notice late last year following news that hedge fund titan John Paulson, who made billions of dollars betting against the U.S. housing market and big banks, was launching a fund focused on gold-related investments.

The return of hedge funds shouldn't come as a major surprise, analysts said. In many ways, the current environment is ripe for starting a new hedge fund. With the global economy appearing to be on the mend, investors have become enamored with riskier assets again, such as emerging markets and corporate bonds.

Many ambitious financiers are also feeling a little more entrepreneurial these days after receiving their year-end bonuses, said Ron Suber, senior partner and head of global sales at the New York-based prime brokerage firm Merlin Securities.

"They are now somewhat flush with cash from getting paid from a good 2009 and have decided to strike now while they see opportunity and liquidity," said Suber.

Much of the new hedge fund activity however, is simply a function of investor demand.

With financial markets on the upswing again, high-net worth clients and sovereign wealth funds are slowly starting to regain their appetite for alternative investments like hedge funds again.

"For managers who had been sitting on the sidelines with new offerings in 2009, that means that now may be the right time to try launching," said Udi Grofman, a partner in the investment management practice at law firm Schulte Roth & Zabel.

Still, the barrier to entering the hedge fund world is perhaps as high as it has ever been, according to experts. Launching a new hedge fund often requires months of accounting, legal and technical legwork, not to mention plenty of start-up cash.

"All that takes much longer than it used to than it did 3, 4, or 5 years ago," said Grofman. "The world has become a much more complicated place."

And then comes the hard part: fundraising.

While some institutional investors have warmed up to the idea of investing in hedge funds again, they aren't extending as much capital as they might have during the pre-crisis days of 2007.

An ambitious hedge fund manager might have been able to raise $500 million or more back then. Now, even $100 million is a major achievement, experts said.

"Although new launch activity has picked up recently, many funds are starting out much smaller than they might have in 2008," said Grace Kim, senior vice-president at Connecticut-based C.P. Eaton Partners, which helps hedge funds raise capital.

"The challenge for them will be to achieve critical mass." To top of page

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