Don Steinbrugge, Agecroft Partners

Thoughts relative to recent high profile hedge fund closures


By Don Steinbrugge, Agecroft Partners – Each January Agecroft Partners releases its predictions regarding the top 10 hedge fund industry trends in the coming year. One of our predictions for 2018 was an increase in hedge fund closures for both large established hedge fund managers as well as emerging managers.

Some people might extrapolate from the recent closures of Highfields Capital Management, Criterion Capital Management and Tourbillon Capital that the hedge fund industry is in crisis. Our view, however, is very different. We believe that these closures are evidence of growth and maturity of the industry.
 
Hedge fund industry assets have reached an all-time high 9 years in a row. The number of hedge funds in existence is near an all-time high that we estimate at over 15,000 funds. This increase in both assets and competition has made the hedge fund industry significantly more challenging from an investing and asset raising stand point.

Roughly the top 5 per cent of managers are receiving a vast majority of the industry flows. Any weakness among the multiple evaluation factors, such as poor performance or departure of key investment professionals, makes it almost impossible to raise money, and often results in withdrawals. Unfortunately, one of the factors investors considering evaluating the quality of a manager is changes in assets under management. If investors begin to see a significant decline, they are more likely to redeem assets that can lead to a death spiral of redemptions.
 
The increase in the number of hedge fund managers and the growth of industry assets to well above $3 trillion is making the capital markets more efficiently priced. This, in turn, makes it much more difficult for most managers to find sustainable inefficiencies from which to generate strong returns.
 
As the hedge fund industry becomes increasingly Darwinist, the stress level of managing a hedge fund organisation increases. Many established managers have found it more difficult to outperform the market while also managing their investor relationships. This makes it less enjoyable to come to work every day. It can be emotionally draining to experience a constant high level of client redemptions.
 
Most business owners in this situation might consider selling their business. Unfortunately, very few hedge fund managers have been able to sell their business. Neither have they been able to build a sustainable, diversified product line up or successfully pass the reins of power to the next generation of leaders while maintaining the same level of investor trust and assets under management. Ultimately, managers facing this pressure are left with few options.
 
We expect to see more high profile hedge funds shut down. However, most of their assets will be recirculated within the industry to other firms that rank better across the evaluation factors investors use to select hedge funds. Assuming there is no major market correction during the fourth quarter of 2018, we ultimately believe that the end of 2018 will mark the 10th year in a row hedge fund industry assets have reached an all-time high.

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