Some readers were skeptical when we warned that the withdrawal of investor cash from hedge funds was a harginger of a sea change. In fact, the hedge fund conference, SALT, had top hedge fund managers like Dan Loeb warn of a “killing field” as more and more investors were questioning not just the lofty fees of hedge funds, but also their entire rationale, as they’ve both failed to outperform to a meaningful degree and correlate more and more with stock market performance.
The Financial Times provided an update tonight. The shrinkage of the hedge fund industry continues. However, incumbents are taking a bit of cheer from the fact that the pace of closures has slowed and volatility has returned to the markets. However, they might be careful for what they wish for, since there have been recent periods of upheaval that they’ve handled badly (famously, quant funds in the crisis, and as the article points out, the market swoon early this year).
While 291 hedge funds shut their doors in the first three months of 2016, just 206 new funds started up, according to data from Hedge Fund Research. Europe was the busiest region for both new funds and closures.
The figures represent a slowdown in closures from the fourth quarter, when 305 funds closed, but an acceleration from the 217 seen in the first quarter of 2015. Last year saw the most closures since 2009….
Market volatility in the first quarter caught many wrongfooted, with the HFRI Fund Weighted Composite Index declining by -0.6 per cent.
Funds have since clawed back ground, and were up 0.8 per cent for the year through May. Improving performance, combined with the expectation for more volatility from market threats including Brexit and interest rate increases by the US Federal Reserve, have helped keep clients invested.
However, the shrinkage in the industry, from $3 trillion under management to $2.8 trillion, has not yet affected fees. And that isn’t surprising. I’d expect it to take a longer period of investor skepticism to shift pricing power more decisively to them:
Despite the turmoil, the average management fee held at 1.5 per cent and the average incentive fee fell just 0.1 per cent to 17.6 per cent, HFR data show.
Funds started in the first quarter had slightly lower management fees, down 0.12 percentage points to 1.48 per cent, while incentive fees ticked up 0.75 percentage points to 18.5 per cent.