Hedge fund liquidations exceed new launches

Hedge fund liquidations exceeded the number of new fund launches last year for the first time since 2009.

The volatility and turmoil in the financial markets in the second half of the year dampened the risk tolerance of investors, and capital redemptions from underperforming funds soared, according to a report by Hedge Fund Research.

Hedge fund liquidations in the fourth quarter of 2015 jumped to 305 from 257 in the previous quarter, and up from 203 liquidations during the same period in 2014.

During the entire year, 979 hedge funds were liquidated, compared with 864 in 2014, the highest number since 2009 when 1,023 funds were terminated. At the same time, new fund launches declined from 1,040 in 2014 to 968 last year.

The number of Cayman-registered funds fell by 2.45 percent in the fourth quarter of 2015 to 10,940, reflecting the general trend, statistics by the Cayman Islands Monetary Authority show. For the full year, the decline was smaller at 0.6 percent.

“Investors have become increasingly discriminating in their capital allocations, and the environment for launching a new fund continues to be extremely competitive,” said Kenneth J. Heinz, president of HFR. “As investor tolerance for negative performance deviations falls, and the demand for competitive fee structures increases, funds which meet these increased institutional investor requirements should attract capital and drive industry performance in 2016.”

The HFR Market Microstructure report also noted that while global hedge fund capital increased to $2.9 trillion last year, performance dispersion declined in the fourth quarter of 2015 as returns for the best and worst performing funds increased.

For the full year, the top performing decile of funds in the HFR index gained 20.3 percent, whereas the worst performing decile lost 25.1 percent. The difference of 45.4 percentage points represents a small decline from the 2014 HFR Index performance dispersion of 46.9 percent.

Incentive fees fell slightly industry-wide in 2015 to 17.7 percent, from a 17.8 percent average a year earlier. New funds launched in 2015 commanded on average 3 basis points higher average management fees of 1.6 percent and 40 bps higher incentives fees of 17.75 percent, compared to funds launched in 2014, HFR reported.