TOKYO/LONDON (Reuters) - Hedge fund closures globally are likely to outpace launches this year for the first time in more than 16 years’ of data, a leading market data tracker said on Wednesday.
This partly reflects rising operational costs and weak performance which has undermined investor confidence. High-profile closures in the year to end-September include Chesapeake Partners and Perry Capital.
The preliminary nine-month roll-call of closures stood at around 566, compared with just 518 start-ups, Singapore-based Eurekahedge said, and adding the trend might continue into year-end.
Satoshi Iwanaga, Chairman of Eurekahedge, told Reuters he thought the number of new launches in the fourth quarter would be limited due to the continuing difficult environment. Preliminary full-year numbers are likely to be available in February, he said.
If the year does end with net closures, it would mark a change in fortunes that not even the financial crisis of 2008 managed to trigger. In 2015, by contrast, 877 hedge funds were newly formed while 833 were liquidated.
“Performance is the main issue that’s putting a lot of pressure on existing hedge funds ... many are below their high water marks and are struggling to make money and cover costs,” said Mohammad Hassan, a head analyst at Eurekahedge.
Hedge funds made average gains of 2.91 percent in the year so far, 1.65 percent in 2015 and 4.88 percent in 2014, data from Eurekahedge showed.
For those funds that did lose money in 2015, many have yet to recover those losses in 2016, the so-called ‘high-water mark’, over and above which hedge funds can begin accruing a performance fee on any outperformance, which many rely on to retain talent.
“The overall feeling for investors is that their existing mandates have not delivered well, so they are going to hold on for the moment and see how these funds perform before they start parking more money into these strategies,” Hassan said. “Current allocation activity in 2016 has been very selective favoring CTAs (funds which follow market trends using computer algorithms), multi-strategy and relative value mandates.”
Years of easy money policies by central banks around the world have dampened the market volatility that many hedge funds thrive on, and although market watchers predict an increase in the coming months, it came too late for many funds.
At the same time, an increase in the cost of meeting tougher regulations and pressure on fees from return-conscious investors have combined to stymie the hopes of some hedge fund hopefuls.
Reporting by Tomo Uetake and Maiya Keidan. Editing by Jane Merriman