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Dec 20, 2015

Third quarter sees hedge funds suffer biggest loss in four years

Falling energy and equity prices spur 4.2 percent slump in HFRI Fund Weighted Composite Index

Hedge fund closures rose, assets under management fell and a key hedge fund index suffered its biggest drop in four years in the third quarter as equity and energy commodities prices plunged, according to data from industry analysis firm Hedge Fund Research (HFR).

The HFRI Fund Weighted Composite Index, the firm’s broadest measure of hedge fund performance, declined by 4.2 percent in the third quarter, its biggest drop since 2011. Hedge fund liquidations in the first three quarters of the year, meanwhile, rose to 674 from 661 in the same period last year.

‘Hedge fund liquidations rose in Q3 2015 as investor risk tolerance fell sharply, and energy commodities and equities posted sharp declines, resulting in net capital outflows, wider performance dispersion and meaningful differentiation between hedge funds,’ says Kenneth Heinz, president of HFR, in a press release.

Falling commodities prices and slowing growth in China and other emerging markets in the three months through September affected hedge fund performance while the expectation of an interest rate hike by the US Federal Reserve ‒ which happened last week ‒ further hit the sector.

The number of hedge fund launches in the third quarter increased despite the lower performance, rising to 269 from 252 in the same period last year. In the first three quarters of the year, however, launches declined to 785 from 814 a year earlier.

The difference in performance between hedge funds, or hedge fund performance dispersion, increased in the third quarter, with the top 10 percent of members of the HFRI Fund Weighted Composite Index gaining 9.3 percent while the bottom decile saw a loss of 21.5 percent.

‘Anticipating a challenging environment in 2016, dominated by the headwind of rising US interest rates, it is likely funds that have demonstrated their value proposition in recent months will continue to attract new investor capital with strong, uncorrelated performance gains in the New Year,’ Heinz says.