Fewer hedge funds closed their doors in the second quarter, but there were also fewer hedge-fund launches, as investors continued to shun startups and smaller firms in favor of large, established players.

Hedge fund liquidations fell to 177 in the second quarter from 240 in the first quarter, bringing the total number of fund closures in the first half of the year to 417, according to data released by Hedge Fund Research Inc.

The industry tracker said steady returns and greater clarify around the impact of financial reform legislation helped reduce the number of fund closures.

In the first nine months of the year, HFR’s weighted composite index returned 1.65%. That compares with a gain of 19.98% for all of 2009 and a loss of 19.03% for all of 2008.

Performance dispersion among hedge funds declined from record levels, with 69 percentage points separating the best and worst performing deciles of funds for the 12-month period ending July 2010: the top decile of hedge funds averaged a return of 52.2% during this period, while the bottom decile lost 16.8%. Performance dispersion had reached a peak level of over 130 percentage points in the 12-month period ending in March 2010.

“Volatility returned to financial markets in second quarter as investors lowered expectations of the global economic recovery,” HFR President Ken Heinz said in a press release. “Despite this volatility, fewer funds have liquidated recently as a function of steady performance, improved structural integrity and renewed investor confidence in the hedge-fund industry.”

An influx of new money also helped stem fund closures in the second quarter, although investors continued to exhibit a clear preference for the industry’s most established firms, allocating nearly all of the $23 billion of new money that entered the industry to firms with more than $5 billion in assets under management. These fund giants currently control approximately 60% of total industry capital.

For the quarter, the fund attrition rate, defined as the number of liquidations as a percentage of the overall number of funds, dropped to below 2.0%.

Funds that allocate money to other hedge funds experienced 54 liquidations, the fewest since the first quarter of 2008. Since the start of the financial crisis, over 800 funds of hedge funds have liquidated, reducing the total number from nearly 2,600 in mid-2008 to approximately 2,100.

Hedge-fund launches also declined in the second quarter, with only 201 funds opening shop. HFR said this was the lowest level since the second quarter of 2009. By strategy, equity hedge and macro funds were the best represented among startups.

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