Hedge Fund Closures Approach Record Rates But There Is a Silver Lining

Pundits are quick to pounce on the near record numbers of hedge fund firms that have folded their tents in 2014. However, it is necessary to consider the alternate side of the balance sheet.

New hedge fund firms are cropping up at near record levels as well, with less than the equivalent amount of fanfare.

An Inconvenient Truth

Naysayers are quick to tout the fact that hedge fund closings have reached levels unseen since the height of the financial crisis in 2009. While this may be a statistically accurate observation, there are a couple of key facts missing from these reports.

• Conspicuously absent from most articles on the topic are the number of new hedge fund debuts. While the numbers reported on shuttered hedge funds are accurate, they do not reflect the balance required in an honest analysis—the disclosure of the number of new funds emerging. Is this oversight intentional?

• Many of these reports fail to mention the record growth of assets under management the hedge fund industry has experienced. Understandably, an article touting record closings would encounter fewer raised eyebrows if it also included statistics citing the large gains hedge funds have made in assets under management.

One can only speculate on the reasons for this one-sided perspective. One thing seems clear—few have passed-up the opportunity to paint hedge funds in the worst possible light.

A Contrarian View

Those seeking to disparage hedge funds by suggesting these closures are a consequence of poor hedge fund gains in comparison to the S&P 500 or other arbitrary benchmarks are, in fact, revealing a profound misconception of the paramount goal of the hedge fund. That goal is the preservation of capital! Significant gains are welcome, to be sure, but the first priority of any hedge fund is capital preservation.

While it is true that the hedge fund industry is on track to see as many as 1000 funds close their doors in 2014, it is equally true that through the quarter ending September, 2014, 814 new funds have launched. In short, net closures to date stand at less than 200. In a competitive industry with more than 11,000 players, to see less than a net 2% fade into oblivion is actually an enviable statistic when compared to enterprises overall, which fail at a 50% rate within 5 years of their inception.

Additionally, one cannot discount the unprecedented growth in hedge fund assets under management, a fact never mentioned in the same breath as hedge fund closures. This is the silver lining the title promises. Hedge funds remain a robust investment vehicle.

Hedge Fund Jobs

Hedge fund closings are decidedly disruptive, but, to suggest that employment opportunities suffer as a result is a disservice to job seekers. As doors close on one opportunity, they open on another. Hedge funds continue to be a vital and growing industry. There is little evidence that employment opportunities are significantly diminished by these closings. In fact, opportunities may be enhanced by emerging startups and existing funds that have absorbed assets under management.