HFR: Hedge Fund Liquidations Lessen in Q1/16 But Still Outnumber Launches

Jun 16 2016 | 5:59pm ET

Hedge funds are closing at a slightly lower pace after accelerating sharply at the end of 2015, according to new data from Hedge Fund Research.

Liquidations edged lower in the first quarter of this year as investors positioned for macroeconomic volatility later in the year, HFR noted in its latest Market Microstructure Report, dropping to 291 in the period compared to 305 in the fourth quarter of 2015. 

However, the tally still represents a sharp year-over-year increase when compared to the 217 liquidations in last year’s first quarter. 

New launches, meanwhile, totaled 206 in the first quarter, up from 183 the prior quarter but sharply lower than the 264 new funds that emerged in the first quarter of last year. 

The data shows the current trend of more funds closing than opening is not abating. Over the past year, 910 funds have launched while 1,053 have liquidated, according to Preqin. Assets, meanwhile, have fallen to $2.86 trillion over the same period. 

European-located management firms led in both fund launches and liquidations, accounting for 120 launches and 187 liquidations in 1Q16, the company’s research showed. 

Part of the issue clearly lies with lopsided performance. The top decile of performance in HFR’s HFRI universe gained an average of +12.1 percent in the quarter, while the bottom decile declined -13.2 percent, while over the past year, the same figures are +16.3 percent and -26.4 percent, respectively – a dispersion of 42.7 percent.

Management fees, meanwhile, were little changed in the first quarter, although Preqin noted the fees commanded by newly launched funds are mixed. Industry-wide, average management fees were 1.5 percent in the quarter, while the average incentive fee fell to 17.6 percent. However, funds launched in the first quarter saw average management fees of only 1.48 percent and average incentive fees of 18.5 percent.

The combination of lackluster performance and investor dissatisfaction with high fees has put increasing pressure on funds over the past few years, with several emerging managers telling FINalternatives at an industry conference in New York this week that their world is a far cry from the traditional “2-and-20” model. For smaller, relatively unproven funds, 1.5% and 10% is much more the norm, they said. 

“Though launches showed an uptick in 1Q16, the environment for new hedge funds continues to be extremely competitive with discriminating investors exhibiting low tolerance for underperformance, resulting in an elevated number of liquidations,” stated Kenneth J. Heinz, president of HFR. “The combination of ultra-low interest rates, flat equity markets and significant macroeconomic uncertainty has contributed to a challenging environment for allocators to achieve required return targets, resulting in intense focus on near-term performance, demands for greater liquidity to accommodate more frequent rebalancing activities, and heightened sensitivity to fee structures. 

“The hedge fund industry has and will continue to evolve with efficient, innovative strategies and structures designed to generate performance through this historic period of low interest rates, which meet increased investor demands and requirements in these areas,” he continued.

Established in 1992, HFR produces the HFRI, HFRX and HFRU Indices, the industry’s most widely used benchmarks of global hedge fund performance. HFR calculates over 100 indices of hedge fund performance ranging from industry-aggregate levels down to specific, niche areas of sub-strategy and regional investment focus.

In Depth

PAAMCO: Will Inflation Deflate the Asset Bubble?

Jan 30 2018 | 9:49pm ET

As the U.S. shifts from monetary stimulus to fiscal stimulus, market pricing should...


CFA Institute To Add Computer Science To Exam Curriculum

May 24 2017 | 9:25pm ET

Starting in 2019, financial industry executives sitting for the coveted Chartered...

Guest Contributor

Boost Hedge Fund Marketing ROI By Raising Your ROO

Feb 14 2018 | 9:57pm ET

Tasked with delivering returns on client capital, a common dilemma for many alternative...