According to Hedge Fund Research, more hedge funds were shuttered in the 4th Qtr of 2015 than at any time since the financial crisis and outstripping the number of new funds that were launched during the quarter.
4th Quarter Data
A new report from Hedge Fund Research revealed that 305 hedge funds closed their doors during the final three months of 2015. This reflects an 18.7% gain from the 257 funds that were shuttered in the prior quarter and a surge of more than 50% from 203 closures during the same period in 2014.
As you can see from the following chart, the 4th Qtr data is the highest number of closings since the first quarter of 2009, in the wake of the credit crisis that lasted took place in 2008. For the year as a whole, 979 hedge funds were estimated to have closed, up from 864 closures seen in 2014. It is also the highest level since 2009, when 1,023 funds closed.
During the 4th Qtr, 183 new hedge funds were launched, representing a 31.9% drop from the previous quarter and a 19% decline from the same period in 2014. The number of new launches in the 4th Qtr was the lowest number of hedge fund startups since the second quarter of 2009.
Reason for Shrinkage
The big question for the industry is why did the overall number of hedge funds shrink in the last three months of 2015? One reason could be that the consistent underperformance of many hedge funds (and the high fee structure) is finally catching up with many players.
Kenneth Heinz, President of Hedge Fund Research explained this drop, “The hedge fund industry experienced a contraction in number of funds in 2015, despite continued growth in investor capital to a record level, as investor risk aversion increased, resulting in capital redemptions from funds which had underperformed through the recent financial-market volatility.”
Our Take
This cannot be good news for the investment research industry if the sharp decline in the number of hedge funds seen in the 4th Qtr continues, as hedge funds have traditionally had the most voracious appetite for external research. In the short run, some underperforming hedge funds may look to bring on new research providers in an effort to turn around their tepid performance in order to convince investors to exhibit patience. However, any long term contraction in the number of hedge funds will have a negative impact on sell-side and independent research providers.