Hedge fund liquidations likely will rise in 2016 and the overall industry might face a reduction in the number of hedge funds, said a report from Barclays Capital.
In its report, “Against All Odds: Hedge Fund Industry Developments and Implications for Growth,” Barclays stated that “based on recent hedge fund performance and the increased challenges to launching (a hedge fund), we estimate that there would be a net decrease in the number of funds by year-end 2016.”
The look ahead is based on a survey of 340 hedge fund investors in the second quarter of 2016, more than half of whom said hedge funds “did not meet their expectations over the last couple of years.” Most, however, said they would not be pulling back on their hedge fund allocations.
Investors blamed the size of the industry and macroeconomic conditions for recent poor performance. Of all respondents, 74% said the hedge fund industry is too big relative to opportunities.
The report said while size has many advantages, one drawback is that as hedge funds get larger, their investible universe becomes smaller. The report cited Novus data that showed since 2012 “position crowding” in U.S. equities has increased significantly, to 5.2% in the third quarter of 2015 from 2.2% in the third quarter of 2012.
“Historically, investing in crowded names has generated positive returns, particularly in stable, rising markets,” the report said. “However, when the reverse happens, it tends to be sharp and painful. The reverse, in this case, started in (the third quarter of 2015), with indices composed of crowded names dropping significantly.”
Fifty-seven percent of respondents blamed macro conditions, specifically when correlation is high, and when dispersion, the difference in stock movements “regardless of whether they are going in the same direction or not,” is low.
Hedge funds, according to an analysis of Hedge Fund Research data, generate 9.9% of alpha when correlation is low and dispersion is high, and only 0.8% of alpha when correlation is high and dispersion is low, the conditions that primarily have been present since mid-2014.
Barclays Capital surveyed a total of 340 hedge fund investors: 73 hedge funds of funds, 66 family offices, 39 endowments and foundations, 38 investment consultants, 37 “other investors,” 30 public pension plans, 26 private pension plans, 18 private banks and 13 insurance companies, representing $7.7 trillion in total assets under management.