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Continued Slow Down in Hedge Fund Startups

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NEW YORK (–Alternative investment strategies remain popular among bullet-dodging investors, but the number of hedge fund launches to meet this demand continues to fall, according to Freeman & Co.’s latest research report.

The number of new hedge fund offerings in the third quarter dropped significantly, totaling 21 new hedge funds and hedge funds of funds, which is less than half the number of startups recorded by Freeman over the same period last year. Even last quarter, startup statistics remained brisk at 35 new funds, but was still a drop of 20% in individual hedge fund launches and a 50% drop in hedge fund of funds.

The number of new funds of funds totaled 12, while nine new single-strategy hedge funds got their start in the third quarter. Freeman officials speculate that the eagerness to enter the business has fallen due to lower returns in 2002. As the word gets out that hedge fund indexes such as the CSFT/Tremont* Hedge Fund index have outperformed equities and moderately beat fixed income since January 1999 through the third quarter of 2002, investors may take more notice of the asset class.

Still times remain tough in the securities markets and hedge funds have taken hits as well. The CSFB/Tremont index lost 0.04% in October, affected by the significant losses of Beacon Hill. The index is only up slightly for the year, 0.85%, which is stellar when compared to the S&P 500 stock index that lost 21.8% over the same time period.

Ultimately, it’s the hedge funds of funds that may end up with the winnings, as investors begin to perceive the fund of funds structure as a vehicle for downside protection. Freeman predicted in its third-quarter report that huge flows of capital over the next five years may flood the hedge funds of funds managers. This trend in turn will primarily benefit the largest hedge funds and funds of funds.

*Tremont Advisers Inc., Rye, N.Y, is a minority investor in, and strategic partner of, HedgeWorld.