Hennessee, the US hedge fund advisory group, says the “attrition rate” for funds it its proprietory hedge fund Index was 5.1% last year. The attrition rate measures hedge funds with assets greater than $10 million that have liquidated during 2006.
Hennessee says that liquidations occur for a number of reasons, including a declining opportunity set for the strategy, poor performance, or career choices, such as the retirement of the portfolio manager. It does not include hedge funds that are currently operating, but have closed to new capital. Hennessee also notes that the 2006 attrition rate is slightly lower than the eight year average attrition rate of 5.2%. The attrition rates for the last eight years are as follows:
1999 4.7%
2000 6.4%
2001 4.3%
2002 3.8%
2003 5.4%
2004 6.2%
2005 5.4%
2006 5.1%
“Despite the fact that the investment management business is extremely competitive, the attrition statistics do no imply that failures in hedge funds are substantially higher than other industries,” says Charles Gradante, Managing Principal of Hennessee Group LLC. “Furthermore, we are seeing evidence of rising barriers to entry within the industry, including the need for more expensive infrastructure to attract institutional money, which favors larger funds and creates difficulty for start-up and moderately sized funds to sustain growth and attract top talent. Long term, we believe the attrition rate will decline as the evolutionary process continues, leaving the industry to be comprised mostly of funds with larger infrastructure and size, commensurate with institutional needs”
The Hennessee Hedge Fund Index is the hedge fund industry’s oldest hedge fund index, having begun in 1987 and been maintained on a real time basis since inception. The Index is used solely as a benchmark for hedge fund managers and investors and is composed of approximately 1,000 hedge funds. The Index is not investable nor is it offered as a hedge fund product.