Hedge fund liquidations reached their highest level since 2009 last year as competition tightened and the European debt crisis coupled with growing concerns about global growth hit the poorer performers hardest, according to a study by industry consultant Hedge Fund Research (HFR).
A total of 873 hedge funds were liquidated last year, with 238 liquidations in the fourth quarter, according to the report. That’s the highest number since more than 1,000 funds were liquidated in 2009 in the wake of the global financial crisis.
At the same time, however, total assets of the global hedge fund industry increased to a record $2.25 tn as the best-performing hedge funds boosted profits and 1,108 new hedge funds were launched, slightly below the 2011 level of 1,113, according to HFR’s Market Microstructure Industry Report.
‘Despite total industry assets increasing to a record level, the capital raising environment continued to be challenging for emerging managers, including both small and mid-sized funds, as well as newly launched funds,’ says Kenneth Heinz, president of HFR, in the report. ‘While emerging manager performance has been strong, the bulk of the capital raised in the past two years has been allocated to the industry’s most well-established firms.’
HFR says management and incentive fees fell throughout the industry last year, with average management fees dropping one basis point from 2011 to 1.56 percent, and average incentive fees falling 17 basis points to 18.54 percent. Management fees charged by new funds – those launched in 2012 – were higher than average, at 1.62 percent, while their incentive fees were lower, at an average of 17.74 percent. HFR says fee levels varied throughout the industry depending on the year of the hedge fund’s launch.
HFR says the top 10 percent of members of the HFRI Index saw a 32.6 percent gain last year, up from a record low gain for the top decile of 19.5 percent in 2011, while the bottom 10 percent fell 16 percent last year, after dropping 30.7 percent in 2011.
‘In order to raise new investor capital, hedge funds must not only demonstrate both superior performance and an innovative strategy, but also increased organizational efficiencies of competitive fees, transparent structures, sophisticated risk management and satisfaction of extensive institutional due diligence processes,’ Heinz says.
He adds, however, that rising equity markets and low fixed-income yields this year are driving investors to allocate investments across the hedge fund industry.
