With hedge fund assets under management hitting an all-time high – topping $3 trillion – another industry milestone appears contradictory. Hedge funds closing their doors in 2016 was at its highest level since 2009, an HFR Market Microstructure Report noted. The high hedge fund failure rate came amid a drop in new fund launches, lowered fee structures but generally positive year to date performance. But all isn’t gloomy, according to HFR, as the process of economic normalization could result in a positive market environment for hedge fund performance across the board.

 

Hedge fund performance: assets under management hit record high along with fund closures

The year 2016 witnessed hedge fund liquidations hit 1,057, leaving the total number of funds at 9,803. The closures passed the 1,023 liquidations from 2009 but did not come close to the record of 1,471 liquidations from 2008.

Hedge funds shutting their door came as hedge fund assets under management rose to a record $3.02 trillion, up from $2.97 trillion in the previous quarter. The lion’s share of assets under management went to larger hedge funds, with funds over $5 billion in assets under management, some 607 funds, manage 69.13% of all assets.

Equity Hedge funds ended 2016 with the largest percentage of assets under management with 28.13%, closely followed by Relative Value hedge funds with 27.06% and Event-Driven hedge funds with 25.75%. Macro hedge funds had 19.06% of assets.

Event Driven hedge funds witnessed the most withdrawals followed by Equity Hedge funds, but inflows offset the losses. Event Driven hedge funds grew from $744.85 million to $777.25 to end 2016, while Equity Hedge funds likewise grew from $829.12 to $849.06. Relative Value hedge funds grew from $772.92 million under management to finish 2016 at $816.77 million.

Hedge fund performance: new launches decline sharply but market environment looks positive as economic normalization occurs

729 new hedge funds were launched in 2016, a sharp decline from the 968 launches the previous year.

Smaller fund managers not only fought for assets under management to generate revenue, but average management and incentive fees declined slightly to end 2016.  Management fees fell to 1.48 percent, a decline of a single basis point as incentive fees fell 10 bps to 17.4 percent.

Newer hedge funds have even larger challenges, as the average management fee for funds launched in 2016 fell to 1.33 percent. The average incentive fee for funds launched in 2016 declined to 17.71 percent, down 4 bps from 2015 fund launches.

“The hedge fund industry fee structure continues the process of evolving to meet increased investor demands, as well as persistently low, albeit increasing, level of interest rates,” HFR President Kenneth J. Heinz said in a statement.

While hedge funds are generally delivering higher performance to start 2017, they still lag the S&P 500 stock market benchmark. The HFRI Fund Weighted Composite Index was up 2.23% year to date basis the end of February while the S&P 500 was up 5.94%. Better days may be on the way, Heinz noted. “Continuation of the process of macroeconomic normalization is likely to drive strong performance across a wide range of strategies in 2017.”