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Hedge fund survival
Asked by Jonathan Barton

Why do so many hedge funds close within the first three years?




Answer By Dave Reynolds

There are a few main reasons why so many funds close during the first three years. First, opening up a fund can be quite expensive. Costs related to administration, auditing, legal advice, web development, office rental and staffing, and any consulting help can easily cost a fund manager thousands of dollars per month. Coupled with this, many managers have a tough time raising initial capital because most institutional investors require a 2-3 year manager track record before investing. As a result, managers face a lot of pressure to post attractive returns during those first few years to attract investors. Unless the manager can secure a considerable amount of investor capital early on, or posts attractive returns during the early years, he might have trouble generating enough income to meet fund expenses. This forces a lot of funds to close within their formative years.