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Hedge fund closures are going to hit 'an all-time high'

closed sign

(Flickr/ Ken Hawkins)
Don Steinbrugge, a managing partner of the Richmond, Virginia-based Agecroft Partners, a marketing and consulting firm for the hedge fund industry, expects more hedge funds to shut down in 2016.

Steinbrugge put together his firm's sixth annual list of trends in the hedge fund industry. His predictions are based on discussions with 2,000 institutional investors and hundreds of hedge funds.

According to Steinbrugge, the hedge fund closings will be driven by four key factors:

  1. "The current number of hedge funds is near an all-time high of 15,000. Given a consistent rate for hedge funds ceasing operations, hedge fund closures should also be at an all-time high."
  2. "This increase in the number of hedge fund managers has reduced the average quality of hedge funds in the industry. Many of the lower quality managers will experience a higher rate of closing down, which is good for the industry."
  3. "Increased volatility in the capital markets increases the divergence in overall return between good and bad managers. This in turn increases the turnover of managers, as bad managers get fired and money is reallocated to those who outperform."
  4. "The competitive landscape for small and mid-size managers is becoming increasingly difficult. They are being squeezed from both the expense and revenue side of their businesses. As discussed earlier in this article, having a superior quality product alone is not enough to generate inflows of capital. As a result, we expect the closure rate to rise for small and mid-sized hedge funds."

Hedge funds performed dismally in 2015. The average fund fell 3.49%, according to Hedge Fund Research.

There were also numerous closings in 2015. About 257 hedge funds closed in the third quarter, according to Hedge Fund Research. That's up from 200 in the second quarter, which ended June 30.

That took the number of hedge funds liquidated through the first nine months of the year to 674, up from 661 during the same period in 2014, the report said.

More closings are expected as year-end redemption notices from investors filter in.

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