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Hedge fund liquidations rise as energy, high yield pressures mount

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Hedge fund launches and liquidations both increased in Q3 2015, as energy commodities and equities posted sharp declines, and high yield credit spreads began to widen, according to HFR's latest Market Microstructure Report.

Hedge fund liquidations totalled 257 in Q3 2015, up from 200 in the second quarter, and the highest quarterly total since Q1 2014, according to the latest HFR , released today by HFR, while total liquidations in the first three quarters of 2015 stand at 674, up from 661 liquidations during the first three quarters of 2014.
The number of hedge fund launches also rose in Q3 2015 despite the market turmoil, with 269 new funds launching, an increase over the 252 launches in Q2 2015, though the YTD launch total of 785 in the first three quarters of 2015 represents a YOY decline from the 814 launches in the first three quarters of 2014. Launches were led by Equity Hedge strategies with 150 launches, although EH also led liquidations with 113 funds shutting down in the quarter.
Hedge fund performance dispersion increased in Q3 2015, as the performance of both the top and bottom deciles declined over the prior quarter, and the HFRI Fund Weighted Composite Index® fell -4.2 per cent. The top decile of HFRI constituents posted an average gain of +9.3 per cent in Q3 2015, while the bottom decile fell -21.5 per cent, on average. In the trailing 12 months ending Q3 2015, the top decile of the HFRI has posted a gain of +23.4 per cent, while the bottom decile has declined -29.0 per cent, resulting in a decile dispersion of +52.4 per cent, an increase from the +46.9 per cent dispersion in 2014.
Industry-wide hedge fund fees were little changed on average, as management fees remained unchanged over the prior quarter, while incentive fees posted a narrow decline. As of Q3 2015, the average industry-wide management fee was 1.51 per cent, although management fees for funds launched within the third quarter averaged 1.68 per cent. The average incentive fee of hedge funds fell by 2 bps from the prior quarter, to 17.76 per cent, while incentive fees for 3Q launches rose to 19.29 per cent. For hedge funds launched during the first nine months of 2015, the average management fee has been 1.59 per cent, with an average incentive fee of 17.91 per cent.
“Hedge fund liquidations rose in Q3 2015 as investor risk tolerance fell sharply, and energy commodities and equities posted sharp declines, resulting in net capital outflows, wider performance dispersion and meaningful differentiation between hedge funds,” says Kenneth J Heinz (pictured), President of HFR. “Although recent performance declines have narrowed the HFRI to only a narrow gain for 2015 through November, many hedge funds which have been conservatively and defensively positioned have posted strong gains for investors through this period of financial market stress. Anticipating a challenging environment in 2016, dominated by the headwind of rising US interest rates, it is likely that funds which have demonstrated their value proposition in recent months will continue to attract new investor capital with strong, uncorrelated performance gains in the new year.”

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