Natural Selection Operating on Funds So Only the Fittest Survive

December 16, 2018 James Heinsman Hedge Fund News


The hedge fund industry as been wringing its collective hands, moaning and groaning about the non-stop closure of large numbers of funds. Perhaps this trend is not a bad thing, but rather a necessary winnowing of the weakest funds, leaving behind only the healthiest funds to continue to perform for investors.


Not only are the overall numbers of hedge funds declining due to liquidations. There are also fewer new funds launching. As a matter of fact, if this year’s trend continues until the year’s end, the number of new hedge fund starts in 2018 will be the lowest since 2000.


Fewer launches and more closures might not be a sign of the difficult economic climate, but more of a Darwinian selection process leaving behind only the “fittest” fund managers.


The industry is maturing while regulations reel in problem funds, tightening the quality of the funds left behind. Only the best funds and their managers can get past the arduous process of collecting seed money and passing the SEC requirements to get to first base.


The data also shows that, although funds are still closing, the numbers are in decline. Liquidations in 2018 are on track to be the lowest for the past ten years.


Three years ago, Martin Taylor closed his $1.5 billion Nevsky Capital fund. The fund performed well over its 20-year life, returning 6400 percent until the end of 2015. He shut down the fund saying that the rise of computer-driven trading, as well as geopolitical risks, might create “erroneous” market trends “which could then persist for far longer than we could take the pain.” Taylor is coming back, he announced last September. He said, “There are ever fewer active participants to ensure price discovery. There will be more opportunities for those active funds that remain.”

Martin Taylor, Natural Selection, Nevsky Capital, Survival of the Fittest,

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