Hedge fund liquidations increased in the last quarter of 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.
In Q4, hedge fund liquidations rose to 305, representing an increase from the 257 liquidations in the prior quarter, as well as the 203 liquidations from Q4 2014. 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 Q3 2015 to 183 in Q4, 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 USD2.90 trillion in 4Q15, an increase of USD22.8 billion over the prior quarter, as a performance-based asset gain offset a small investor net capital outflow of USD1.52 billion, the first quarterly net outflow since Q4 2011.
Hedge fund performance dispersion fell in Q4 2015, as returns for both the top and bottom HFRI deciles rose from Q3 2015. The top decile of HFRI performance gained an average of +10.7 pert cent in Q4 2015, while the bottom decile declined -9.4 pert cent, up from +9.2 and -21.5 pert cent, respectively, in Q3 2015. For FY 2015, the top HFRI decile gained +20.3 pert cent, while the bottom decile fell an average of -25.1 pert cent, a dispersion of 45.4 pert cent, representing a narrow decline from the 2014 HFRI performance dispersion of 46.9 pert cent.
Industry-wide average management and incentive fees declined in 2015, though fees for newly launched funds increased for the year. Average management fees ended Q4 2015 at 1.50 pert cent, down -1 basis point (bps) over both the prior quarter and the YE 2014 level of 1.51 pert cent. Similarly, average industry-wide incentive fees ended 2015 at 17.7 pert cent, unchanged from the prior quarter, but down slightly from the YE 2014 average of 17.8 pert cent. For the vintage of funds launched in 2015, the average management fee was 1.6 pert cent, an increase of 3 bps over the vintage of 2014 launches, while the average incentive fee for 2015 launches increased to 17.75 pert cent, 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 to a record level, as investor risk aversion increased, resulting in capital redemptions from funds which had underperformed through the recent financial market volatility,” says Kenneth J Heinz (pictured), 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.”
