Starting a hedge fund with more capital and scoring top first-year returns point to higher chances of survival in the often risky business, Goldman Sachs Group Inc said in research released on Friday.
Goldman, which has helped launch and finance thousands of hedge funds, said almost all newcomers survive their first year but that only 62% of all funds remain in business after five years.
The “break even point after which less than half of managers … remain up and running seems to lie somewhere between 6 and 7 years,” said Goldman’s Hedge Fund Survivorship 2020 report released to clients.
2020 has been extra tough for hedge funds battling gyrating markets during the coronavirus outbreak. Liquidations hit their highest quarterly level since 2015, the data show.
Americas-based managers tend to launch funds with slightly more money, averaging $230 million, than those in Europe, with $200 million, and Asia, with $98 million. But the survival rate is lower in the Americas, at 53%, compared with 64% in Europe and 62% in Asia.
Nearly three-quarters of the funds that launched with $1 billion or more in assets are still in business, with assets reaching an average of $2.9 billion, the data show. Among the smallest funds that start with less than $25 million, only 40% are still in business, Goldman said, putting their average lifespan at 36 months.
Strong returns in the early years often translate into strong foundations for the business, the report said, with the industry’s largest managers scoring an average of 18% in their first year. Smaller funds returned 9% to 11%.
(Thomson Reuters, reporting by Svea Herbst-Bayliss; editing by Richard Chang)