Key Takeaways
- • Hedge funds declined 3.1% in October 2018 and were down 2% through the first 11 months of 2018, marking a brutal performance period for the industry.
- • Technology-focused hedge funds suffered their worst monthly performance on record, losing 10.2% in July 2018, driven by margin calls and forced selling, according to JPMorgan analysis.
- • Hedge fund closures accelerated significantly, with 240 funds shutting down by March 31, while the total number of operating hedge funds fell to 8,946 with attrition rates reaching 3.2% to 4% in early quarters.
- • Investor redemptions are accelerating as fee structures remain punitive relative to performance; average incentive fees stand at 19.12% despite persistent underperformance versus low-cost alternatives.
- • Quantitative hedge funds experienced their worst single day in over six months as market volatility forced rapid unwinding of short positions and risk reduction strategies across the industry.
Summary
The hedge fund industry endured severe headwinds throughout the first half of 2018, with aggregate returns turning sharply negative and investor confidence eroding rapidly. Through November 2018, hedge funds posted a 2% loss for the year, with October alone delivering a 3.1% decline. This performance deterioration proved particularly acute for technology-focused strategies, which experienced their worst monthly performance on record in July, posting a 10.2% loss according to JPMorgan estimates. The technology sector downturn was compounded by margin calls and forced selling that cascaded through leveraged portfolios.
The persistent underperformance has triggered a wave of fund closures and investor redemptions. Hedge Fund Research documented 240 fund closures by March 31, with the total hedge fund population declining to 8,946 funds. Industry attrition rates reached 3.2% to 4% in the first and second quarters respectively, with closures consistently outpacing new fund launches. This represents a structural contraction in the industry following years of relative stability.
Investor frustration with fee structures has intensified as performance has deteriorated. Hedge funds typically charge 2% management fees plus 20% performance fees—generating average incentive fees of 19.12% across the industry—yet returns have significantly lagged low-cost passive alternatives. This disconnect has prompted larger institutional investors to reassess hedge fund allocations and demand fee concessions from managers.
Market volatility in late 2018 forced additional portfolio stress across the industry. Quantitative hedge funds suffered their worst trading day in over six months as managers rushed to unwind short positions and reduce leverage. The simultaneous derisking across multiple strategies amplified market pressure and contributed to broader equity market weakness, creating a self-reinforcing cycle of forced selling and redemptions that further pressured fund valuations and investor confidence.
The persistent underperformance has triggered a wave of fund closures and investor redemptions. Hedge Fund Research documented 240 fund closures by March 31, with the total hedge fund population declining to 8,946 funds. Industry attrition rates reached 3.2% to 4% in the first and second quarters respectively, with closures consistently outpacing new fund launches. This represents a structural contraction in the industry following years of relative stability.
Investor frustration with fee structures has intensified as performance has deteriorated. Hedge funds typically charge 2% management fees plus 20% performance fees—generating average incentive fees of 19.12% across the industry—yet returns have significantly lagged low-cost passive alternatives. This disconnect has prompted larger institutional investors to reassess hedge fund allocations and demand fee concessions from managers.
Market volatility in late 2018 forced additional portfolio stress across the industry. Quantitative hedge funds suffered their worst trading day in over six months as managers rushed to unwind short positions and reduce leverage. The simultaneous derisking across multiple strategies amplified market pressure and contributed to broader equity market weakness, creating a self-reinforcing cycle of forced selling and redemptions that further pressured fund valuations and investor confidence.
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