New hedge fund launches are declining in one of the most difficult fundraising environments managers have faced since the global financial crisis.
The rising cost of running a small money management firm, fee pressure from potential investors, demand for differentiated strategies and a dearth of anchor investors all are dissuading hedge fund managers from setting up their own shop, observers said.
"Fundraising is extremely tough for hedge funds in the ninth year of a bull market," said Andrew Saunders, senior managing director at Castle Hill Capital Partners Inc., New York, a specialist consultant to hedge funds.
Mr. Saunders said hedge fund fees are being pushed down and it's hard for a small manager to "keep the lights on" when the desired fee formula from investors is no management fee and a 10% performance fee.
"Seeding at 2% and 20% is much different than zero and 10%. Managers could always model their expenses at 2% and figure out how to stay in business, but how do you model zero?" Mr. Saunders queried.
The volume of new hedge fund launches in the quarter ended June 30 — 148 — was the lowest since the fourth quarter of 2008 when just 56 funds began operation, showed data from Hedge Fund Research Inc., Chicago.
Since the financial crisis, the pace of hedge fund introductions peaked at 1,113 in 2011 and has been on a steady downward trajectory ever since, according to HFR data.
With just 306 hedge fund debuts in the first half of this year and if the pace of fund launches continues through year-end, 2018 will be the worst year for new hedge fund generation since 2000, when just 328 funds started trading.
Current conditions are extremely tough for hedge fund manager launches, partially explaining declining levels of funds hitting the market, sources said.
"It's one of the most difficult environments I've seen for new launches. The cost of launching has risen dramatically due to new regulations, enhanced focus on operational due diligence," said Jacob Walthour Jr., CEO and partner of Blueprint Capital Advisors LLC, New York, which offers a platform for investment in small, niche-focused credit hedge fund managers.
Investor preferences have changed, and "you can't rely on finding a substantial anchor investor, particularly family offices," which for many years were the main source of startup capital for hedge fund managers, Mr. Walthour said.
Blueprint runs a total of $1.1 billion on its investment platform, of which $360 million is under advisement.