Hedge Funds

Number of hedge funds continues to shrink as launches fall to financial crisis levels

How hedge funds have capitalized on Brexit volatility

Hedge fund liquidations in 2016 are on track to hit the highest number since the financial crisis, while launches during the third quarter slumped to lows not seen since the first quarter of 2009, according to data from Hedge Fund Research (HFR).

Despite the overall number of hedge funds tumbling to 9,925 by the end of September – the first time it has fallen below 10,000 since 2014 – the total amount of funds under management has jumped to a record high of $2.979 trillion dollars as positive performance has more than compensated for net investor outflows in recent months.

November saw continued positive performance for funds according to data provider Preqin, with its All-Strategies benchmark gaining 1.00 percent for the month of November, pushing year-to-date returns up to 6.74 percent.

On a regional basis, North American funds performed the most strongly again in November, returning 2.89 percent to bring returns for the first 11 months of the year to 9.09 percent. In terms of strategies,event-driven not only had the strongest November, delivering 2.34 percent, but is also in the lead year-to-date with a return of 10.74 percent to now.

Pressure on fees has continued throughout the year with HFR reporting a 1 basis point slip in average management fees to 1.49 percent while the average performance fee has relented 10 basis points to 17.5 percent.

Brexit impact

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In a set of three surveys carried out by Preqin firstly prior to the U.K. referendum vote, then immediately after it and finally in November, U.K-focused and EU-focused hedge fund managers were asked their views on the impact of Brexit for their industry.

Given only 11 percent of managers surveyed expected the Leave camp to triumph and markets had already largely priced in victory to the Remain camp, there was a lot of risk taken off the table in the run-up to the vote as managers anticipated asymmetric rewards from betting heavily on a Remain win.

Positions set to benefit from a Leave victory – such as short U.K. equities or sterling – were therefore trading cheap which prompted some canny managers to pick these up shortly prior to the session close heading into the overnight vote count.

Although a difficult year overall for Odey Asset Management, founder Crispin Odey who was a high profile backer of the Leave campaign, drew a sharp profit from shorting domestic equities including real estate plays Intu Properties and Berkeley Group. Asset management company Marshall Wace also played the Berkeley short, in addition to shorts on budget airline EasyJet and support services group Carillion.

Some hedge fund managers raced to reposition once the vote result drew clearer. There was ample time to do this given stock market futures took longer to adjust than the instantaneous reaction in foreign exchange markets to the Sunderland vote result in the very early hours of June 24, which was seen as a key turning point in sentiment about which way the vote count would finish.

Quant funds did particularly well in the market chaos that picked up throughout the night as they capitalized on bearish trading patterns.

"When things go from normal to bad, they may not make money; but when things go from bad to worse, that is a continuation of a trend and that is when they profit," Lasse H. Pedersen, a principal at quant manager AQR Capital, told reporters of such strategies.

Others, including Third Point's Dan Loeb took the weekend to adjust portfolios in light of Friday's result.

"Over the weekend following the vote, we investigated the actual impact of Brexit and, after concluding the average predicted scenario was too severe, we quickly repositioned our equities portfolio by covering shorts, adding to several long positions, and initiating a new position in a European event-driven situation," his second quarter investor letter read, in a move the famed investor went on to say paid off for his fund.

Hedge fund relocation

Impact of Brexit on hedge funds

Preqin's most recent survey of Brexit views, undertaken in November, showed the overwhelming majority of U.K.-focused and EU-focused managers were either uncertain of its impact or thought it would not have a big impact on their investing ahead.

Only 5 percent thought it would have a long-term negative impact and of the 53 percent who said the vote outcome had affected their 2016 second half performance, 60 percent said it had been for the better.

On a less encouraging note, the question of whether hedge funds will seek to relocate from the U.K. drew a more cautious response in November, following the increased perceived likelihood of a 'hard Brexit' than when managers were asked in the immediate aftermath of the vote.

Whereas 80 percent of respondents in July said they did not anticipate changing location, this slipped to 70 percent in the most recent survey, with the number who now said they were uncertain jumping to 24 percent and those saying there were considering edging up to 6 percent.

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