Nearly 20% of hedge funds could liquidate by Q1 of next year according to Bank of America Merrill Lynch.Returns have been decent this year, with hedge funds averaging 1.65% returns year-to-date globally. The problem however is that 40% of hedge funds are believed to still be under their ‘high water mark’, which means that they still can’t charge performance fees. For smaller fund managers with less assets, this means their management company’s income prospects will remain weak, so they might just call it a day.
“Going into the year-end, there will be significant closures and we estimate it could be as high as 20 per cent,” Fredericks said in an interview Sept. 17 in Hong Kong. “A large portion of managers are still below high-water marks. Performance is flat and money hasn’t been flowing to smaller managers.” High-water mark refers to the historical peak net asset value of a hedge fund.
Hedge fund liquidations as a percentage of the total number of funds will rise from about 15 per cent in each of the last two years because most of the new money coming into the industry is going to the largest managers, said Fredericks.
There were almost 7,000 hedge funds, excluding funds of hedge funds, in the $1.65 trillion global industry at the end of June, according HFR. The industry attracted $23.3 billion of new money from investors in the first half, HFR said.
Large hedge funds are thriving with new client inflows and massive scale, while the smaller guys struggle to make money. Thus it’s not so much that the hedge fund model is finished, it’s that it’s now becoming a game dominated by an enormous few, who can weather lackluster markets while waiting for the next performance-fee generating surge.