Hedge fund liquidations still on the rise as returns remain firmly in the red

The great financial crisis seemed to be the source of an industry reckoning, but COVID-19 is a whole new reality that hedge fund managers are still assessing. Active managers are not faring well, according to new figures from Credit Suisse Prime Services. The brokerage firm estimates that equity long/short funds will be down 3% for the year-to-date through June, while event-driven strategies will be -9.7% over the same time frame. “Since early March, both performance and positioning data indicate a sub-set of strategies and funds engaged markets tactically to enhance YTD performance,” a June report from the prime brokerage stated. Officials say that despite improving economic data, June is on track to have offered tactical profit opportunity again for equity-based funds. The firm reported increased shorting activity and that some funds are monetizing serial spikes in U.S. cyclical and value stocks. Credit Suisse found nearly flat returns for the year-to-date through May, with event-driven multi-strategy offerings losing more than 11%. According to index shop HFR, new hedge fund launches declined to a near-record low in the first quarter as the global pandemic began. The latest HFR Market Microstructure Report also showed near-record lows in investor risk tolerance. An estimated 84 new hedge fund launches took place in the first quarter of 2020, which is the lowest number since the financial crisis of the fourth quarter 2008. There has been an ongoing slowdown of fund launches in the hedge fund industry as investors continue to liquidate capital and shrink absolute return allocations. “While the launch environment to begin 2020 has been extremely challenging as a direct result of the drop in investor risk tolerance, institutional allocators which had reduced, eliminated or failed to implement hedge funds or other risk-reducing alternative allocations were subjected to higher levels of portfolio volatility,” said Kenneth Heinz, president of Chicago-based HFR. He added that the firm expects interest from forward looking institutional investors to drive a more favorable launch environment in the second half of 2020. In 2019, a total of 480 new hedge funds launched and so far HFR’s figures point to a gradual launch slow-down. And then there are hedge fund liquidations, which are on a steeper ascent. Fund liquidations surged to an estimated 304 funds in the first quarter, which was the highest figure total since 2015. It represents a 50% increase from the prior quarter and the bleak fact that the first quarter represents the seventh consecutive quarter in which estimated liquidations outpaced launches. Much the trend is driven by returns and the question of whether volatility helps hedge fund performance. The investable HFRI 500 Fund Weighted Composite Index was up 1.9% in May, but year-to-date returned -3.9%. The overall numbers only tell part of the story, as hedge fund performance dispersion ballooned in the first quarter. HFR said that top-decile performance for the quarter was 15.5%, while the bottom decile managers returned -40.7%. These trends have led to a decline in fees industry wide. The average hedge fund management fees and incentive fees across the board declined by 1 basis point from the fourth quarter 2019 – to 1.38% and 16.4%, respectively. It is the lowest level of fees since HFR began publishing these estimates.

Hedge fund liquidations still on the rise as returns remain firmly in the red

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