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Fund Spy

Don't Write the Obit for Hedge Funds Yet

New hedge funds and hedgelike mutual funds continue to pop up.

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Lots of ink has been spilled about the demise of hedge funds since turmoil in the financial markets accelerated in last year's third quarter. Some pundits have predicted that hedge fund assets would shrink by as much as 75% and that half of those in existence would close up shop. There's no denying that many are closing. So far, nearly 30% of hedge funds in our database have either told us that they've closed or have stopped reporting performance to us for at least six months (a sign that they have likely ended up in the hedge fund graveyard). Many more are suffering large asset declines, but it's premature to say that hedge funds are history.

The (Alternative) Resistance Lives On
It's true that the pace of new fund launches in the first quarter of 2009 was roughly half that of the past five years, causing a decline in the number of funds for the first time in memory. Expecting the hedge fund industry to shrink further is not outlandish following the Bernie Madoff and Alan Stanford scandals and the fact that hedge funds experienced their worst year on record in 2008. But even during the market's darkest days of late 2008 and early 2009, new hedge funds were opening. A search of Morningstar's hedge fund database recently revealed nearly 100 inceptions in the fourth quarter of 2008 and 75 launches in the first quarter of 2009.

New hedge funds continue to come to life, and one might expect them to look different now. After such a tumultuous year, it seems reasonable to expect new funds to assume less risk, but that does not appear to be the case. Emerging-markets equity funds account for 15% of the new funds, for example, despite having been in one of the market's toughest corners (the Morningstar Emerging Market Equity Hedge Fund Index was the worst-performing and most volatile hedge fund category index in 2008). And while the fact that some new hedge funds are not yet reporting to our database makes them difficult to quantify, we've seen news reports announcing the launch of many distressed-debt, currency, and futures funds.

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Ben Alpert does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.