Hedge funds are shutting at a rate not seen since the financial crisis, as many managers post disappointing returns and an elite group of firms dominate money raising.
The $37 billion Brevan Howard Asset Management LLP is the latest firm to close a fund. Last week it pulled the plug on its $630 million commodity fund managed by Stephane Nicolas after it had tumbled 4.3 percent this year through the end of October, according to a person with knowledge of the firm.
In the first half of the year, 461 funds closed, Chicago-based Hedge Fund Research Inc. said. If that pace continues, it will be the worst year for closures since 2009, when there were 1,023 liquidations.
“Most hedge funds have not performed extraordinarily well,” said Stewart Massey, chief investment officer at Massey Quick & Co. in Morristown, New Jersey, which invests in the private partnerships. He expects that redemptions will hit small-and medium-sized firms this year, reducing assets to a level where “they will have to make a decision whether to carry on or not.”
Hedge funds, on average, have returned just 2 percent in 2014, their worst performance since 2011, according to data compiled by Bloomberg. Smaller funds have struggled to grow as institutional investors flocked to the biggest players. In the first half of 2014, 10 firms including Citadel LLC and Millennium Management LLC accounted for about a third of the $57 billion that came into the industry.
Dan Loeb’s Third Point LLC told investors it would open Oct. 1 for a limited amount of capital. It raised $2.5 billion. Bill Ackman’s Pershing Square Capital Management LLP gathered $2.7 billion in October with an initial public offering of a fund. Ackman has produced a 42 percent return for investors this year through November 25.
Many of the closures have been among macro funds, which have returned less than 1 percent this year, on average, according to Bloomberg data. Macro managers have complained that in an environment of low interest rates and muted swings in prices, it’s difficult to make money.
Josh Berkowitz’s Woodbine Capital Advisors LP said earlier this year that it was closing down after assets dwindled to $400 million from a peak of $3 billion four years ago. Keith Anderson’s Anderson Global Macro LLC and Kingsguard Advisors LP, started by two former Goldman Sachs Group Inc. traders, both shut after less than three years in business.
Some commodity strategies have also struggled as oil prices have tumbled. Hall Commodities LLP, a London-based $100 million hedge-fund firm run by Tony Hall and Arno Pilz, told clients in October it’s shutting down after less than two years, citing poor performance.
Other managers have struggled to regain after years of losses. Dan Arbess said last month that he’s closing his Perella Weinberg Xerion Fund after failing to recoup a 21 percent loss dating from 2011. The fund, which focused on distressed credit and special situations, hadn’t been able to charge any performance fees since then.
The $740 million Archipel Asset Management AB told investors in October it was closing after its biggest backer, Stockholm-based Brummer & Partners, pulled out because of lackluster performance. Archipel, which traded based on computer models, lost 3 percent in 2013 and 1.3 percent in the first nine months of this year.
Massey of Massey Quick expects to see more redemptions and closures among long-short equity funds, which have underperformed the bull market in stocks because they bet on falling shares as well as those they wager will rise. Stock hedge funds have climbed 41 percent since the end of 2008, according to data compiled by Bloomberg versus a 153 percent rise in the Standard & Poor’s 500 index.
Investors, he predicts, will end up pulling from funds at exactly the wrong time, giving up on their insurance just as stock markets tumble.
“I don’t think the next five will be like the last five,” he said. “But that’s classic investor behavior.”