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Hedge fund liquidations rise to conclude 2015 as investor risk tolerance falls

Friday, March 18, 2016
Opalesque Industry Update - Hedge fund liquidations increased to conclude 2015, as volatility and turmoil from the second half of 2015 resulted in falling investor risk tolerance and capital redemptions from underperforming hedge funds, according to the latest HFR Market Microstructure Report, released by HFR, the established global leader in the indexation, analysis and research of the global hedge fund industry.

In 4Q15, hedge fund liquidations rose to 305, representing an increase from the 257 liquidations in the prior quarter, as well as the 203 liquidations from 4Q14. For the full year (FY) 2015, an estimated 979 hedge funds liquidated, an increase from the 864 fund liquidations in 2014, and the highest calendar year total since 2009, when 1,023 funds liquidated.

New hedge fund launches also declined to conclude 2015, falling from 269 in 3Q15 to 183 in 4Q, the lowest quarterly launch total since 2009. For FY 2015, new launches declined to 968 from 1,040 in the prior year, the lowest calendar year total since 935 funds launched in 2010.

As previously reported by HFR, total global hedge fund capital rose to $2.90 trillion in 4Q15, an increase of $22.8 billion over the prior quarter, as a performance‐based asset gain offset a small investor net capital outflow of $1.52 billion, the first quarterly netoutflow since 4Q11.

Hedge fund performance dispersion fell in 4Q15, as returns for both the top and bottom HFRI deciles rose from 3Q15. The top decile of HFRI performance gained an average of +10.7 percent in 4Q15, while the bottom decile declined ‐9.4 percent, up from +9.2 and ‐21.5 percent, respectively, in 3Q15. For FY 2015, the top HFRI decile gained +20.3 percent, while the bottom decile fell an average of ‐25.1 percent, a dispersion of 45.4 percent, representing a narrow decline from the 2014 HFRI performance dispersion of 46.9 percent.

Industry‐wide average management and incentive fees declined in 2015, though fees for newly launched funds increased for the year. Average management fees ended 4Q15 at 1.50 percent, down ‐1 basis point (bps) over both the prior quarter and the YE 2014 level of 1.51 percent. Similarly, average industry‐wide incentive fees ended 2015 at 17.7 percent, unchanged from the prior quarter, but down slightly from the YE 2014 average of 17.8 percent. For the vintage of funds launched in 2015, the average management fee was 1.6 percent, an increase of 3 bps over the vintage of 2014 launches, while the average incentive fee for 2015 launches increased to 17.75 percent, an increase of 40 bps over funds launched in 2014.

“The hedge fund industry experienced a contraction in number of funds in 2015, despite continued growth in investor capital toa record level, as investor risk aversion increased, resulting in capital redemptions from funds which had underperformed through the recent financial market volatility,” stated Kenneth J. Heinz, President of HFR. “Investors have become increasingly discriminating in their capital allocations, and the environment for launching a new fund continues to be extremely competitive. As investor tolerance for negative performance deviations falls, and the demand for a competitive fee structures increases, funds which meet these increased institutional investor requirements should attract capital and drive industry performance in 2016.”

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