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Oct 18, 2015

Fee cuts may force hedge fund closures

Lower fee income and declining performance pose particular threat to small funds, the Financial Times reports

A sharp drop in hedge fund income from performance fees combined with lower overall returns in the industry could spur a wave of closures among new and established funds, according to media reports.

Hedge fund income from performance fees declined more in the first half of this year than in the previous seven years combined, the Financial Times reports. New hedge funds are now charging performance fees of 14.7 percent, compared with 17.1 percent last year, with the biggest drop among long/short hedge funds, the newspaper says, citing Eurekahedge data. Fees were 18.8 percent in 2007.

‘With increasing competition in the industry, regulatory costs and the current market uncertainty, lower fees could lead to an early demise for otherwise good hedge fund investment models,’ Mohammad Hassan, senior analyst at Eurekahedge, tells the newspaper. ‘If things deteriorate, you could see closures spike over the next year. Smaller funds will be more at risk, given their business model [has] a larger reliance on performance fees.’

Well-known hedge funds including the $2 bn Fortress Investment macro fund and Renaissance Technologies’ $1 bn computer-driven fund have already closed this year amid poor returns, the paper reports.

According to Hedge Fund Research, the industry analysis and index firm, its broad-based HFRI Fund Weighted Composite Index fell 1.1 percent in September, marking the fourth straight monthly drop and the longest stretch of declines since the financial crisis of 2008. The loss since June reached 5 percent, for a year-to-date drop of 1.3 percent.

Event-driven hedge fund investment strategies suffered the most last month, with the HFRI Event-Driven (Total) Index falling 2.1 percent, bringing year-to-date losses to 2.9 percent. The HFRI ED: Activist Index, which tracks the performance of hedge funds with activist investment strategies, fell most in the category, with a drop of 4.8 percent in September, and a year-to-date loss of 4.4 percent.