Hedge fund liquidations declined narrowly to begin 2016 after rising sharply to conclude 2015, as investors positioned for macroeconomic volatility in Q2 2016, including Brexit and possible interest rate increases by the US Federal Reserve.
The number of liquidations dropped to 291 in Q1 2016, falling from 305 closures in the prior quarter but still representing a sharp year-over-year increase from the 217 liquidations in 1Q15, according to the latest HFR Market Microstructure Report, released today by HFR. New hedge fund launches totalled 206 in the first quarter, up from 183 the prior quarter, but a decline from the 264 new funds that began in Q1 2015.
In the trailing 12 months, 910 funds have launched while 1,053 have liquidated. At the end of Q1 2016, the total number of active single-manager hedge funds was 8,430, down from the Q3 2015 record of 8,566; total capital under management fell to USD2.86 trillion over the same period. European-located management firms led in both fund launches and liquidations, accounting for 120 launches and 187 liquidations in Q1 2016.
Hedge fund performance dispersion was mixed in Q1 2016, as returns for the top HFRI decile increased while bottom HFRI decile declined from Q4 2015. The top decile of HFRI performance gained an average of +12.1 per cent in the quarter, while the bottom decile declined -13.2 per cent, expanding from averages of +10.7 and -9.4 per cent, respectively, in Q4 2015.
Over the last four quarters, dispersion declined slightly, as the top HFRI decile gained +16.3 per cent, while the bottom decile fell an average of -26.4 per cent, a dispersion of 42.7 per cent. This represents a narrow decline from the FY 2015 HFRI performance dispersion of 45.4 per cent. The HFRI Fund Weighted Composite Index fell -0.6 per cent in Q1 2016, but has gained +0.8 per cent YTD through May.
Average management and incentive fees industry-wide were little changed in Q1 2016, though fee trends for newly launched funds were mixed. The overall industry-wide average management fee stood at 1.5 per cent, while the average incentive fee fell -0.1 per cent to 17.6 per cent. For the vintage of Q1 2016 fund launches, the average management fee was an estimated 1.48 per cent, slightly below the industry average and a decline from the 2015 launch average of 1.6 per cent; average incentive fees for newly launched funds increased to 18.5 per cent, up from the 2015 average of 17.75 per cent.
“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,” says Kenneth J Heinz (pictured), 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.”
