Exiting managers cast pall over hedge fund industry

By Svea Herbst-Bayliss - Analysis

BOSTON (Reuters) - Running a hedge fund was long considered the crown jewel in finance but this summer a growing number of managers have called it quits, unable or unwilling to keep going during one of the industry's worst-ever years.

Last week Dan Benton, whose savvy technology bets at Pequot Capital Management and Andor Capital Management catapulted him into an industry star, told investors he plans to shut down his fund in October.

Earlier this month, business journalist Ron Insana, who promised clients access to some of world's most famous hedge funds through his extensive Rolodex, told investors that it was "imprudent" to continue business operations.

And before that, Jeff Dobbs announced plans to shut down Turnberry Capital Management after many of his investors had already asked for their money back.

"There certainly seems to be a bigger number of hedge fund managers going out of business right now than ever before," said Brad Alford, founder of Alpha Capital Management, an advisory firm that invests in hedge funds.

While the three men gave different explanations for getting out now, a common theme seems to be that running a hedge fund may not be worth the headache.

Tumbling stock prices, the deepening foreclosure crisis, and rising unemployment rates have made for volatile trading conditions that translated into losses at many hedge funds.

The average hedge fund, after posting the industry's worst-ever first-quarter returns, is off 3.54 percent this year through July, according to Hedge Fund Research data.

While that is less than the average stock mutual fund's roughly 11 percent loss during the same time, it is enough to unnerve wealthy investors, who once poured so much money into hedge funds that industry assets doubled in three years.

NO LONGER A SURE THING

Hedge fund managers often promised to make money in all markets but several said that shorting stocks, the way to make money in down markets, is becoming more difficult and expensive as ever more investors are trying that strategy, making it tougher and costlier to locate the stocks to short. In turn, funds' potential for profits are reduced as their bets are no longer a sure thing.

This means the prospect of earning a 20 percent performance fee on top of a 2 percent management fee, numbers that lured thousands of traders and portfolio managers into the industry, is in jeopardy.

Performance fees are paid for gains, not losses, and this year some individual hedge funds have lost as much as 20 percent, some investors who saw the data said.

"By my math, some people are taking a pretty big pay cut to be running a hedge fund and who needs that?" said one manager who asked to remain anonymous in order to speak candidly.

Already more global hedge funds have closed their doors in the first quarter of 2008 -- 170 at last count -- than during the same time a year earlier, according to data from Hedge Fund Research. And that number is expected to rise for the second quarter when HFR releases the data next month.