Fund closures to continue despite ‘easy money’ in Q1

The start of 2017 was a chance for hedge funds to make ‘easy money’ according to an industry expert who warned a tough remainder of the year will see a wave of closures.

Speaking at the GAIM Ops event, a panel highlighted the challenges facing funds in 2017 which includes fee pressures, global uncertainty and geopolitical uncertainty.

Following on from a year where only 182 hedge fund managers were established – almost half of that of 2015 – and 981 were liquidated, one panelist said the industry should not be fooled by a strong Q1.

“The first third of the year has bailed out some people, some of those folks are just holding on,” one expert said.

“Don’t think the closures are done with, there are too many funds out there and too many people running funds who shouldn’t run funds.”

According to Preqin, Q1 2017 performance for hedge funds was 3.18%, the highest first quarter figures since 2013.

“The last two thirds of the year are going to be more difficult environment-wise, the easy money has been made this year,” the panelist added.

The panel agreed that fees remain the number one challenge to fund managers, despite the uptick in performance. The 2% management fee and 20% performance fee model has been scrutinised heavily by large institutional investors after several years of unimpressive returns.

Some hedge funds have been restructuring their fee proposition to an extent, in response to investor demand.

Fees have declined by a handful of basis points (bps), but not dramatically so. Data from Hedge Fund Research in Chicago found the average management fee for funds launched in 2016 stood at 1.48%, a slight fall from 1.6% in 2015.

Performance fees for 2016 launches were at 18.8%, a 100bp rise from 17.75% in 2015. However, the industry posted respectable gains in 2016 as it navigated the shock Brexit and Trump election effectively.

Some managers are also offering performance hurdles, performance crystallisation time-frames, longer lock-ups, assurances around capacity agreements, equity stakes and revenue shares in order to entice institutional clients.

Another panelist at GAIM Ops added that new fund launches have been able to secure capital through new fee initiatives.

“New launches attracting capital because of the fees and the opportunity of not wanting to miss out on a new launch,” said one manager.