Hedge Fund Liquidations Surged as Pandemic Rocked Markets

The coronavirus pandemic triggered a sharp acceleration in hedge fund closures during the first quarter of 2020, with liquidations reaching 304—the highest quarterly figure since the fourth quarter of 2015. This represented a stark 54 percent surge from the 198 liquidations recorded in the final quarter of 2019, according to Hedge Fund Research. The spike reflected widespread operational stress and performance deterioration across the alternative investment industry as markets experienced severe dislocation.

Industry performance suffered materially during this period. Hedge funds declined 11.3 percent in the first quarter before mounting a partial recovery, trimming losses to 5.1 percent by the end of May. Total industry assets fell below $3 trillion—a significant contraction from the prior quarter's peak—as both performance headwinds and redemptions pressured capital bases. Kenneth Heinz, president of Hedge Fund Research, attributed the losses directly to the pandemic's impact on global financial markets. The S&P 500 declined 20 percent in Q1, establishing the severity of the environment hedge funds faced.

Strategy-specific performance divergence was pronounced. Equity and event-driven strategies bore the heaviest losses, each posting approximately 15 percent declines in the first quarter. However, as equity markets staged a recovery through May, equity hedge funds' performance improved to a 5.7 percent loss, while event-driven strategies posted an 8.7 percent loss over the first five months. This partial recovery trajectory reflected the broader market rebound that followed the initial pandemic shock.

Specific fund closures underscored the industry-wide stress. Parplus Partners and Malachite Capital Management, reported respectively by Institutional Investor in March and Bloomberg that same month, were among the casualties. Additionally, Allianz Global Investors liquidated two Structured Alpha hedge funds after sustaining heavy losses on stock-options trades, according to a company spokesperson.

Compounding the liquidation surge, new hedge fund formations collapsed to near-record lows in Q1 2020. This pullback in launches reflected both investor caution and the challenging fundraising environment created by pandemic-related volatility and uncertainty, signaling that institutional capital formation in alternatives had effectively halted during the crisis period.