Zombie Update: The Silent Hedge Fund Apocalypse

First three paragraphs sort of say it all here

More hedge funds have closed in the last decade than were open for business at the start of it, according to industry numbers from HFR.

A total of 9,000 hedge funds and fund of funds have liquidated since the start of 2005, almost as many as HFR estimates exist now: 10,150. At the end of 2004 there were around 7,500 funds offering to manage cash.

The figures are a reminder of the transient nature of such high fee investment vehicles, which on average survive for only five years. The rapid turnover adds to questions about how such vehicles can be suitable stewards of capital for large long term investors such as pension funds.

Source: HFR

Source: HFR

 

I can’t help but read this and think of reviewing some prospect’s statements and noticing how they are sometimes littered with hedge funds that forgot to “hedge” or do much of anything else. We feel quite bad for these investors because they have built up a lifetime of savings through hard work only to have someone sell them something that doesn’t really exist beyond a random chance that they can outperform the markets in absolute terms or on a relative basis.

To make matters worse, these hedge fund managers close their funds because once they have a sustained period of underperformance, few of them will get paid anytime soon. Hedge funds usually have a watermark provision that requires them to hold off from payment until they have recouped any investment losses and also exceeded an investment benchmark. Instead of doing this, the best perceived options for these managers is to simply close shop and start a new fund. Needless to say, this is very suspect behavior on many levels.

The last paragraph of this article is also somewhat mind-numbing for me:

The point isn’t all hedge funds are bad, it’s that constant failure makes selection of funds so difficult, even before the recent industry track record is considered: for the last five years, the average hedge fund has failed to beat a simple portfolio of stocks and bonds. Which may, of course, be why so many have liquidated.

What?… That is like saying, “Drinking kerosene isn’t bad, it’s that constantly throwing up and needing to go to the hospital afterwards makes selecting the right kerosene bottle to drink difficult to do.” It seems to me that the Financial Times wants to keep the advertising dollars flowing.

 

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