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Hedge Fund Attrition Drops in '05

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NEW YORK (–Last year may not have been great for hedge funds from either performance or capital inflow perspectives, yet fewer funds closed in 2005 than in 2004.

According to figures from the Hennessee Group LLC, the attrition rate for hedge funds with more than US$10 million in assets was 3.9% last year. That figure doesn’t include hedge funds that are still running money but that have closed to new investment.

Hennessee’s 2005 fund closure figure is two percentage points lower than 2004′s 5.9% attrition rate–which was adjusted upward from Hennessee’s original 2004 figure of 5.3%–and one percentage point below the Hennessee Group’s seven-year average annual attrition rate of 4.9%.

Charles Gradante, managing principal of the Hennessee Group, said his firm’s calculation of the number of funds that close their doors every year undermines a previously reported claim that 15% of hedge funds close down annually. That number, he said, more than likely includes both funds that fail and liquidate as well as funds that close to new investment but keep operating.

“It has been reported that hedge funds have a 15% failure rate, with many hedge funds entering the marketplace due to low barriers to entry, followed by liquidation due to poor performance,” Mr. Gradante said in a statement. “Our findings using the Hennessee Hedge Fund Indices do not support the perception that the hedge fund attrition rate is 15%, as this number likely includes hedge fund managers who close to new capital but are still in business.”

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Contact Bob Keane with questions or comments at [email protected].