What Does It Take for a New Hedge Fund to Make It? $250 Million
It’s a tough bar, made all the more challenging by today’s volatile markets, mounting set-up costs and thrifty investors.
(Bloomberg) -- For a baby sea turtle there’s a 1 in 1,000 chance of making it to adulthood. If you’re starting a hedge fund, the odds may look just as daunting.
Only the fittest survive in the fund business -- and that means starting up with at least $250 million, according to a report from Goldman Sachs Group Inc. that’s making the rounds on Wall Street. It’s a tough bar, made all the more challenging by today’s volatile markets, mounting set-up costs and investors who are tightening their purse strings.
How tough? Of the 468 U.S. hedge funds that have used Goldman’s prime brokerage services since 2009, almost half are out of business. The majority of those funds shuttered in the first three years, according to the bank’s report, which was originally published in January.
“There’s probably five to 10 people out there, women and men, who are worth more than their fees,” legendary hedge fund manager Stan Druckenmiller said earlier this month at The Economic Club of New York. “There are still going to be superstars, but we need to get back to maybe 200 or 300 from 4,000” funds.
A fund’s prospects improve considerably if it begins trading with more than $250 million, according to Goldman, which primarily works with long-short equity managers. Anything below that threshold, funds have a less than 1 in 2 chance.
The odds improve to 62% for funds that start with between $250 million to $500 million, and jump to 84% for those that open with more than $1 billion. This year, only a few funds are expected to start trading at that $1 billion-plus level.
Still, it’s not strictly a straight line. Survival odds fall back to 54% for firms that start with between $500 million and $1 billion, Goldman’s study found.
Strong returns, naturally, boost a fund’s chances. The average annualized performance of the funds still operating is about 8%, according to Goldman. Shuttered funds averaged annualized returns of 1.7%.
--With assistance from Gillian Tan.
To contact the reporters on this story: Hema Parmar in New York at hparmar6@bloomberg.net;Katia Porzecanski in New York at kporzecansk1@bloomberg.net
To contact the editors responsible for this story: Alan Mirabella at amirabella@bloomberg.net, Josh Friedman, Melissa Karsh
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