Volatile market conditions have slimmed down the hedge fund industry over the past year, but industry executives continue to support a temporary ban on short-selling, and many say an industry trimming is for the best.

According to Hedge Fund Research Inc., even before the most recent economic turmoil, market conditions contributed to over 180 hedge fund liquidations in the second quarter.

The number of funds liquidated in the first half of this year climbed 15% from a year earlier, to 350, the Chicago research company said last week. At that rate the number of funds that would close this year would increase over 24%, to 700, or 7% of the industry.

Kenneth J. Heinz, the president of Hedge Fund Research, said in an interview Tuesday that he expects the industry's consolidation to continue as a result of the financial crisis.

The industry is experiencing the widest gap between the best-performing and worst-performing funds in its history, he said.

"Previously it was hard to differentiate the top-performing hedge funds from the worst funds, but now we are seeing a wide gap," Mr. Heinz said. "I think this illustrates the environment we are in. … It is harder to launch funds and harder to keep a poor-performing fund from liquidating."

Fewer than 500 funds were launched in the first half of this year, including only 240 in the second quarter. That pace, if continued in the second half, would result in the lowest full-year total since 2001.

The industry's overall attrition rate of 3.46% in the first half is likely to approach 7% for the year. Last year's rate was 5.95%.

Hedge Fund Research estimates that there were over 10,200 hedge fund vehicles managing over $1.93 trillion as of June 30. That includes 7,600 single-manager funds; 147 such funds were launched in the second quarter, and 157 were liquidated.

Mr. Heinz said this is not the first time the hedge fund industry has experienced heavy liquidations. In 2005, 850 hedge funds closed.

The hedge fund industry is still growing, but not as quickly as it did in the past, he said. In the first half $28 billion of capital was invested in the funds.

Last week the Securities and Exchange Commission put a temporary ban on short-selling roughly 950 financial-related stocks until Oct. 2. Analysts said the ban could have a major impact on the hedge fund industry in the next few months.

Hedge fund companies were not included on the list of institutions whose shares cannot be sold short, but some, including Man Group PLC, the United Kingdom's biggest hedge fund manager, have asked to be put on the list. Some large fund managers are fearful that rivals will short-sell their stock as an alternative to the protected banks and insurers.

Florence Lombard, the chief executive officer of the Alternative Investment Management Association, a hedge fund trade group, said that in general the industry supports a short-term short-selling ban, because it will bring "equilibrium" to the financial market. "It is our position, however, that banning short-selling of financial stocks, while it may indeed bring temporary relief, creates an artificial market. It will not ultimately, on its own, bring back investor confidence in the banking system."

The Managed Funds Association also supports a temporary ban on bets that financial stocks disagreed. However, in a Sept. 21 letter to the SEC, the group said the ban should be adjusted to permit hedging.

Markets are "undergoing an extremely stressful period,'' because of "poor lending, risk management, and disclosure decisions made historically by many financial institutions, and not from short-selling activities,'' Richard Baker, the trade group's president, wrote in the letter.

Mr. Baker, a Louisiana Republican who served in the House of Representatives before joining the trade group in February, said the SEC has not agreed to meet with his group to discuss the short-selling rules.

Analysts said if that the ban on short-selling were extended beyond the Oct. 2 deadline, it could hamper hedge fund managers that use quantitative approaches, since many would need to change their models completely or liquidate.

Mr. Heinz said he expects the hedge fund industry will continue to "evolve" to deal with the constraints surrounding short-selling. "It is difficult to determine what the overall impact of these new rules will be since we do not know the extent or the duration of the policy."

He also expects new funds to continue to launch and old ones to continue to add assets. He said the largest hedge fund companies are hiring executives that have become available as a result of things like the Lehman Brothers bankruptcy filing and Bank of America Corp.'s deal to buy Merrill Lynch & Co. Inc.

"The current turmoil is going to present opportunities for companies that want to develop their hedge fund businesses," Mr. Heinz said. "There are going to be opportunities to bring aboard top talent and new clients as a result of everything that has transpired over the last few weeks."

However, along with the opportunities, "there will also be huge risks until all of this shakes out," he said.

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