Most of the time this makes sense. A majority of funds enjoy initial profitability. So what happens if they suffer a 20% loss?
-Keep going, try to beat high water mark: Not much incentive for manager considering he's not getting paid, and the investor may be worried because of bad positions that may go worse.
-Close, and start a new fund: Many times the fund closes at a gain (gross) since inception, so the investor isn't too pissed. The manager has incentive to perform once again. The fund can enter new positions or strategies without relying on the troubled ones that got them into the mess as in scenario A.
The proof is in the pudding...very often the money for these new funds comes from the investors of the previous fund. There is a reason for that.
