Hedge Fund Liquidations Rise
Thursday, June 10, 2010

After falling steadily for four quarters, hedge fund liquidations rose again in the first quarter of 2010 with 240 funds closing during the period, new research shows.

According to the HFR Market Microstructure Industry Report released on June 8 by Hedge Fund Research (HFR), liquidations were disproportionately skewed towards Fund of Funds (FOF), with 102 FOFs closing in the quarter, marking the seventh consecutive quarter in which FOF liquidations have exceeded new launches.

Aggregate industry leverage employed by hedge funds has continued to moderate relative to five years ago, the report finds, with 70% of all funds, which manage 83% of industry capital, utilizing some form of leverage. Relative Value Arbitrage and Macro strategies commonly employ higher levels of leverage than Event Driven and Equity Hedge strategies. Larger funds typically exhibit a greater usage of leverage, with nearly 30% of all funds greater than USD1bn employing leverage in excess of two times their investment capital.

The report also concludes that incentive fees are continuing to fall in response to pressure from investors. Average incentive fees declined by eight basis points to 19.12% in the first quarter of 2010, the steepest drop since 2Q 2008, although average management fees were unchanged for the quarter at 1.58%.

Meanwhile, the performance gap between the best and worst hedge funds in terms of returns narrowed during the period under review, with the top decile of all hedge funds returning an average of +15.2%, and the bottom decile losing an average of -8.6%.

“Both investors and fund managers are continuing to exhibit a heightened sensitivity to leverage and risk, even with the benefit of the performance recovery from 2009,” said Ken Heinz, President of HFR.

“Managers are employing lower levels of leverage in response to higher realized asset volatility and higher costs of obtaining leverage, as well as investor preference for a less volatile return profile," he concluded.