More hedge funds closed their doors in 2016 than in any year since 2008, but this hasn’t stopped the total assets under maanagement in the hedge fund industry from reaching another all-time high, according to a Hedge Fund Research report released Friday.
There were 1,057 fund liquidations last year, compared to just 729 new fund launches, a steep drop from 968 launches in 2015. Yet total hedge fund capital increased to a new high of $3.02 trillion, even as the industry saw negative net asset flows for the first time since 2009. The number of closures, despite a record level of industry capital, underscores “the shifting investor risk tolerance and steadily increasing concentration of investor capital in mid-to-large hedge fund firms,” said HFR President Kenneth Heinz in a statement.
The report provides further insight into the changing landscape of hedge fund investing, most notably with fees. The average management fee charged by new funds last year declined to 1.33 percent, down from 1.6 percent in 2015. Incentive fees followed a similar path, down to an average 17.71 percent for newly launched firms. Heinz said the industry fee structure is continuing to evolve, not only to meet investor demands, but also to account for the “persistently low, albeit increasing, level of interest rates.”
Performance figures also show an increasing disparity between good and bad hedge funds. According to the HFRI Fund Weighted Composite Index, which tracks more than 2,100 funds in the research firm’s database, the top 10 percent of performers gained an average of 13.73 percent in the fourth quarter and 32.7 percent for the full year, while the bottom decile declined an average 10 percent and 15.5 percent for the same periods. This represented a wider return dispersion than seen in the prior year, the report notes.
Energy and basic materials equity strategies far outperformed other sectors among HFR’s equity hedge indices, returning 18.86 percent in 2016. The technology sector was far behind, with returns of 2.84 percent for the year, while only the healthcare index saw losses, at negative 1.49 percent.
In HFR’s regional indices, funds with a primary focus on North America returned 8.8 percent last year. The HFRI Western/Pan Europe Index was the only region with losses, declining 3.25 percent.