Key Takeaways
- • 1,057 hedge funds liquidated in 2016, the highest number since the 2008 financial crisis, according to Hedge Fund Research Inc. data released March 17, 2017—exceeding the 1,023 closures in 2009 and marking severe industry contraction.
- • Industry assets rose to $3.02 trillion despite fund closures, but the total number of funds fell to 9,893 (the fewest since 2012), reflecting consolidation toward larger players and a net $70.2 billion in investor outflows during 2016.
- • Hedge fund underperformance versus equities persisted, with the average fund underperforming the S&P 500 Total Return Index every year since 2008; the HFRI Fund Weighted Composite Index gained only 2.2% in the first two months of 2017 versus 5.9% for U.S. stocks.
- • Wealth concentration accelerated sharply, with only 19% of funds managing more than $1 billion controlling 91% of industry capital; firms with more than $5 billion in assets under management controlled nearly 70% of total hedge fund assets.
- • New fund formation collapsed to post-crisis lows, with only 729 funds launched in 2016 versus 968 in 2015, signaling institutional and retail investors' retreat from emerging managers amid fee pressure and performance concerns.
Summary
The hedge fund industry contracted significantly in 2016, with liquidations reaching their highest level in nearly a decade as investors redirected capital toward larger, more established firms and withdrew assets amid persistent underperformance. According to Hedge Fund Research Inc., 1,057 funds closed during the year—the most since 2008—while simultaneously, fewer new funds were established than at any point since the financial crisis. The combination of record closures and minimal new launches underscores a fundamental reshaping of an industry that has faced sustained criticism over fees and returns.
Despite the wave of liquidations, total assets under management rose modestly to $3.02 trillion in 2016, a counterintuitive result that reflects both the industry's consolidation around larger players and the resilience of established funds that retained investor capital. However, the overall fund count fell to 9,893 by year-end—the fewest since 2012—indicating that the dollar value gains were concentrated among a shrinking number of entities. The $70.2 billion in net outflows during 2016 reveals persistent investor skepticism. Fee pressure has begun to ease allocator terms: the average management fee declined slightly to 1.48%, and performance fees dropped 10 basis points to 17.4%, suggesting that investor leverage is starting to force concessions.
The performance gap between hedge funds and public equities has become a critical pain point for the industry. The average hedge fund has failed to beat the S&P 500 Total Return Index (including reinvested dividends) in every year since 2008—a nine-year underperformance stretch that has eroded institutional confidence. This weakness extended into early 2017, with the HFRI Fund Weighted Composite Index posting just a 2.2% gain in the first two months of the year, substantially lagging the 5.9% return for U.S. equities.
The most striking structural shift has been the accelerating consolidation of assets among mega-funds. Funds managing more than $1 billion represented only 19% of the industry's total headcount but commanded 91% of capital; those with more than $5 billion under management accounted for nearly 70% of industry assets. This concentration has devastated the emerging manager segment, with new fund launches in 2016 falling to 729—down from 968 in 2015—reflecting institutional allocators' preference for scale, track records, and operational infrastructure over unproven managers, regardless of their strategies. The combination of record fund closures, minimal new formations, and the exodus of capital from smaller players signals that the post-crisis recovery in hedge funds has definitively given way to a reckoning over value and performance.
Despite the wave of liquidations, total assets under management rose modestly to $3.02 trillion in 2016, a counterintuitive result that reflects both the industry's consolidation around larger players and the resilience of established funds that retained investor capital. However, the overall fund count fell to 9,893 by year-end—the fewest since 2012—indicating that the dollar value gains were concentrated among a shrinking number of entities. The $70.2 billion in net outflows during 2016 reveals persistent investor skepticism. Fee pressure has begun to ease allocator terms: the average management fee declined slightly to 1.48%, and performance fees dropped 10 basis points to 17.4%, suggesting that investor leverage is starting to force concessions.
The performance gap between hedge funds and public equities has become a critical pain point for the industry. The average hedge fund has failed to beat the S&P 500 Total Return Index (including reinvested dividends) in every year since 2008—a nine-year underperformance stretch that has eroded institutional confidence. This weakness extended into early 2017, with the HFRI Fund Weighted Composite Index posting just a 2.2% gain in the first two months of the year, substantially lagging the 5.9% return for U.S. equities.
The most striking structural shift has been the accelerating consolidation of assets among mega-funds. Funds managing more than $1 billion represented only 19% of the industry's total headcount but commanded 91% of capital; those with more than $5 billion under management accounted for nearly 70% of industry assets. This concentration has devastated the emerging manager segment, with new fund launches in 2016 falling to 729—down from 968 in 2015—reflecting institutional allocators' preference for scale, track records, and operational infrastructure over unproven managers, regardless of their strategies. The combination of record fund closures, minimal new formations, and the exodus of capital from smaller players signals that the post-crisis recovery in hedge funds has definitively given way to a reckoning over value and performance.
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