Market turmoil seen fueling hedge fund launches

NEW YORK May 4 (Reuters) - A wave of hedge funds are being launched this year by traders as the financial crisis fuels a shakeout of talent from Wall Street banks and big investment firms, an industry executive said.

Record redemptions last year prompted hundreds of hedge funds to shut down, and swooning markets have made it difficult to raise new capital. Still, one leading financial services technology firm said a growing number of managers are braving the tough environment to strike out on their own.

"There's a huge resurgence of new start-ups," said Jayesh Punater, chief executive of Gravitas Technology, whose company builds and manages technology systems for investment firms.

Tech companies like Gravitas are often one of the first calls made by fund managers when they launch a new firm. Gravitas, formed in 1996 to serve broker-dealers, has worked with hedge funds since 2004.

Punater says his firm in the first quarter saw 16 funds launched and nine in April. Meanwhile fund launches are getting much bigger: typically from $35 million to $150 million under management to as much as $500 million.

Among some of the newest launches, Gravitas said, are Mudrick Capital Management LLC, where former Contrarian Capital manager Jason Mudrick intends to launch a long/short equity fund this summer

Gravitas is also helping Lightbox Capital LLC, a computer-driven equity fund formed by former Lehman Brothers managing director Andy Ellner.

Wall Street banks, crushed by credit and market losses last fall, have been under pressure from shareholders and regulators to rein in risk-taking. Many firms slashed or shut down making investments or trades with their own capital.

Meanwhile, hedge funds were squeezed by market losses and a record $154 billion in redemptions, with the average fund down 19 percent. Funds are unlikely to surpass previous high water marks for years and that means no performance based fees for fund managers.

The founder may stay on to lead the firm back, but No. 2 or No. 3 traders may not want to stay for one or two years before they get big bonuses.

"Many of the proprietary traders and investment managers at large, sell-side shops -- firms that no longer have an appetite running a balance sheet -- are leaving, setting up their own shops," Punater said.

Nearly 1,500 funds were liquidated last year, according to Hedge Fund Research, while 659 were launched. That was the smallest number of new funds since 2001 and just one-third the number that opened shop in 2005. (Reporting by Joseph A. Giannone; Editing by Tim Dobbyn)