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Hedge fund liquidations rise again

Date: Friday, June 11, 2010
Author: Hedge Funds Review

Hedge fund liquidations rose for the first time in a year in the first quarter of 2010. A total of 240 funds and funds of funds closed, according to data from Hedge Fund Research.

The figures were skewed towards funds of hedge funds (FoHFs). With 102 closures in the first quarter of this year, liquidations have now exceeded launches for seven consecutive quarters.

Overall there were slightly more launches than liquidations with 254 new funds, predominantly single-manager funds.

Hedge Fund Research said investors were continuing to put pressure on managers for more attractive investment returns. The average performance fee dropped by 0.8 percentage points to 19.12% in the first three months of 2010, although the average management fee remained static at 1.58%.

The average performance fee charged by FoHFs has dropped since the beginning of 2008 but rose between the end of 2009 and the first quarter of 2010 to 7.33%.

Performance dispersion between the best and worst deciles of performance narrowed, with the top decile of all hedge funds returning an average of 15.2% while the bottom decile lost an average of 8.6%.

Nearly 70% of all funds, representing 83% of industry assets, use some form of leverage, typically between one and two times assets under management. Larger funds typically use more leverage, with nearly 30% of all funds with over $1 billion under management using leverage in excess of two times their investment capital.

Only a fraction of hedge funds, just 0.2% of the industry, use more than 10 times leverage.

Hedge Fund Research president Ken Heinz said the use of leverage had fallen over the past five years.

Heinz added that investors and fund managers were continuing to show a heightened sensitivity to leverage and risk.

Hedge Fund Research also issued figures showing a poor May performance for hedge funds. Its fund weighted composite index fell by 2.26% for May on the back of the continued sovereign debt crisis. Year-to-date performance now stands at 1.32%.

Equity hedge was the weakest sector, falling 3.7% in May. Event driven strategies lost 2.2%. Risk arbitrage fell 0.98% and macro strategies performed a little better losing 0.94%.