It's been a rough couple of years to be a hedge fund. Weak performance, enhanced regulation and an aggressive crackdown on insider trading have cast a harsh spotlight on the industry.
Not that you'd know it by looking at the new crop of traders leaping into the profession. More new hedge funds started in the first quarter of this year than in any quarter since 2007, according to data from Hedge Fund Research.
There are many reasons for the surge. The industry, despite disappointing returns, remains a destination for large swaths of institutional money. Pension funds, endowments and wealthy families continue plowing billions into hedge funds every year, swelling overall industry assets to more than $2 trillion. With that kind of money, the economics are extremely attractive for upstarts who think they can raise big sums.
At the same time, talent is fleeing the big Wall Street banks. New regulations put into place after the financial crisis forced banks to close down their proprietary trading desks, leaving dozens of traders looking for their next act. Many of them decided to try their hands at starting hedge funds. New funds are also in vogue as investors tire of bigger, more established managers who have demonstrated lackluster performance.
But the success rate of new hedge funds is low. Those with ambitions to be the next Bridgewater Associates are plenty; those who succeed are rare.Though 304 funds were started in the first quarter of the year, 232 were liquidated in the same period. Most of them are anonymous funds, largely managing the money of friends and family.
The hedge fund industry “is like the restaurant business: everyone wants to start one but they aren't prepared for the high level of failure,†said Omeed Malik, head of the emerging manager program at Bank of America Merrill Lynch. “One thing the vast majority of the top emerging managers have in common is the three P's: pedigree, performance and product.â€
Among the more prominent new funds created by well-known firms includes one from Renaissance Technologies, as AR magazine reported this week. But a number teams have left bigger hedge funds recently to start their own shops.
Some of these so-called spinoffs are seasoned industry veterans and are expected to attract real money. Others are newcomers who are starting with family cash and may need to prove their mettle quickly if they want to attract other investors.
SAC Capital, the behemoth hedge fund run by the billionaire Steven A. Cohen, has had two groups of veterans leave the firm recently. Such departures are typical for a firm the size of SAC, which has more than 100 portfolio managers, and numerous hedge fund managers can trace their lineage to SAC, a nearly 20-year-old shop based in Connecticut.
Among the new funds are Adams Hill Capital, started by Andrew Schwartz, who was a longtime portfolio manager at SAC, where he ran a hig hly successful equity fund focused on global resources. He will take with him two analysts and a trader, according to people familiar with the fund. Another SAC alumnus is also heading out with four analysts from his team. Jos Shaver, who arrived at SAC in 2008, is relaunching a hedge fund he ran before the financial crisis. He closed his fund down after complications with a service provider. At SAC, he has run a stock fund focused on global utilities and infrastructure.
John Lennon, 29, left JAT Capital, where he was a senior analyst, to start his own shop, Pleasant Lake Partners. He has hired a former Goldman Sachs partner, David Mastrocola, to be the firm's president.
Jeff Lignelli left Appaloosa Management, the hedge fund started by David Tepper, to start Incline Global Management this April. A former partner at Appaloosa, Mr. Lignelli has the rare stamp of approval from Mr. Tepper, who made an initial investment with his former employee. The firm now manages just over $100 million.
Even some less-seasoned financiers are trying their skills. Schuster Tanger, a scion of the Tanger family, which built substantial wealth running nationwide shopping outlet malls, is starting a fund at the age of 26. Mr. Tanger, a former Third Point analyst, will team up with Josh Packwood, a former associate at Citadel who was the first white valedictorian of the predominantly black Morehouse College. The new fund, Red Adler, was started with a $30 million initial investment from Mr. Tanger's family.
