Taking The "Fun" Out Of Hedge Funds

On the precipice of another new year, the hedge fund industry is fighting to overcome its troubles of the last 12 months. The

reports that in 2010, the average hedge fund closed up a mere 7.5%, compared with the average stock market indexes like the S&P 500

, which is up 13%. Through the end of the third quarter, hedge fund closures declined 32%, with 585 firms closing their doors. Sam Hocking, head of prime brokerage at BNP Paribas, told the New York Post that if the market continues to be as tough as it has been, a lot of investors will simply throw in the towel. Stanley Druckenmiller is one of the first to go. After a slump of only 5%, he announced in August that he plans to retire. The hedge fund industry is also feeling the pain of the Department of Justice, which has been investigating numerous funds for insider trading, including Raj Rajaratnam's $3.7 billion Galleon Group and a $1.5 billion health-care fund managed by Morgan Stanley's

FrontPoint Partners. Andrew Schneider, a founder of hedge fund services firm HedgeCo Networks, told the New York Post that as a result of these and other investigations, investors are now starting to hold back new investments in event-driven and M&A types of funds. “Investors are saying, ‘We don't know who's involved and we don't want to take the chance,'” he said.