The more assets flow in, the more funds fail. What the eff is going on?

The correlation is chilling: The more assets flow into hedge funds, the greater the number of fund failures. Just look at the Cayman Islands, domicile of about 80% of the world’s hedge funds. According to the law firm Walkers, nearly 1,900 hedge funds set up shop there over the past year, while 575 shut down over the same period. Guy Locke of Walkers, which represented Long Term Capital Management in its near collapse eight years ago, told the Financial Times that there has been a “pick-up in failures” in the last six months as a result of too much cash going after to few opportunities. “Over the past couple of years the big blow-ups were mainly due to fraud,” said Locke, “but there is now a clear trend of fund failures due to poor performance.”

And a rising number of the failures are among hedge funds that gobbled up distressed securities. The problem, said Locke, is that many new HFs are finding themselves in deep over these “very risky” investments. The more established ones, he said, are “sitting on their hands,” waiting for the few good opportunities to come along.

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