2019 was the fifth year on the trot that fund closures exceeded openings.

Hedge fund closures exceeded launches in 2019. Further, according to data from Hedge Fund Research, more than 4,000 hedge funds have closed shop over the past five years. The $3.2 trillion hedge fund industry is, as a result, down to less than 9,000 funds, says Chief Investment Officer.

What was once a go-to industry for rising investment professionals, has been battered by markets that tended “straight-up” for longer than expected. Hedged investments typically underperform in such a one-way bullish environment. This factor reflected on hedge fund returns for 2019. According to the Bloomberg Global Hedge Fund Index, hedge funds gained just 7.8% during the year, a far cry from the 29% achieved by the S&P500.

A relentless flow of funds to passive investment vehicles such as low-cost ETFs has come at the cost of hedge funds. Investors had withdrawn $81.5 billion from hedge funds by end-November 2019. The relentless outflows were a big factor that triggered hedge fund closures.

Hedge fund closures and launches in 2019

The hedge fund industry saw the smallest number of launches of new funds of 328 in 2000. At 388, new launches in 2019 were only marginally above that number.

Intense pressure on hedge funds’ fees also compounded difficulties for fund managers. The 2-and-20 structure came under threat, and many desperate funds have halved fees to and 1-and-10 structure.

Clearly, the dollar signs in hedge fund professionals’ eyes are starting to fall off. Forget new entrants – even stalwarts such as Jeff Vinik and Louis Bacon left the industry aghast by downing shutters on their funds. They were driven to do so by difficulties in raising funds and poor returns.

However, the exodus out of the industry through hedge fund closures may have a sunnier side. Weak and marginal players that crowded the industry and pressured overall returns had to exit.

This trend would be beneficial for the remaining industry participants.

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