Cayman hedge fund cancellations spike

(CNS Business): The number of hedge funds registered in the Cayman Islands has fallen after cancellations more than doubled new authorisations in the final quarter of 2015, leaving Cayman’s hedge fund count sitting just below the 11,000 level, against a background of significant volatility in investment markets. At the end of 2015 there were 10,940 funds on CIMA’s register, which includes all regulated funds in Cayman but not the large number of funds which are not required to be regulated, for example funds with less than 15 investors.

The running total now stands little changed from the 11,090 in place at the end of 2014 and interrupts an impressive period of growth for the industry in the summer, where six months of solid expansion saw the total reach 11,215 at the end of Q3, which brought 2013’s record high into sight.

CIMA confirmed to CNS Business that 702 funds were cancelled during the fourth quarter of 2015, with 309 funds registered over the same period. It is not unusual for closures to spike up towards the end of the calendar year, as operators make sure to process any required cancellations by year-end, to avoid paying fees for the upcoming year on the various entities in the structure.

While the seasonal factor has clearly been at play, it is has also been a tumultuous period for some high-profile hedge funds, with a raft of major liquidations and closures last year, followed by a severe global stock market correction and a collapse in commodity prices.  In October, Bloomberg reported that hedge funds with more than $16 billion in capital had shut down over the course of the year due to market volatility, with Fortress Investment Group and Bain Capital some of the biggest and best known losers.

Prequin’s Global Hedge Fund Report, released this week, also showed a downturn in start-up managers, which, if it persists, could have implications for future industry growth in Cayman. The number of hedge fund manager launches fell to 223 in 2015 from 345 in 2014 and 410 in 2013, Prequin said, which was the lowest for 13 years. The report pegged global assets in the hedge fund industry at $3.2 trillion, with some $180 billion being added during the course of 2015.

The drop in new managers is likely evident not only of market volatility but also the impact of increased regulation and greater barriers of entry to the hedge fund business. The cost of adding the sort of systems required to deal with all the international directives like FATCA, the Dodd Frank Act and AIFMD has sent compliance costs sky-rocketing in recent years.

Investors are also starting to demonstrate more caution towards hedge funds. The wild swings in asset prices in the third quarter of this year were followed in Q4 by the first, albeit modest, quarterly net outflow for four years. Index and analysis group, Hedge Fund Research (HFR), said that while investor net inflows totaled $43.8 billion for 2015, inflows in the first nine months of the year were tempered by a net capital outflow of $1.52 billion in the fourth quarter, mainly affecting mid- and smaller-sized managers.

Size and scale have long been major advantages for hedge fund managers, with bigger firms better able to cope with the increased cost and complexity of international regulation and the larger managers have not been affected by these outflows, with inflows concentrated among the largest firms, HFR said. Large managers (with assets under management (AUM) of more than $5 billion) still saw $3.2 billion of inflows of in the fourth quarter, while investors withdrew $2.8 billion from firms managing between $1 billion and $5 billion and pulled $1.9 billion from firms with AUM under $1 billion.

In a survey for its Hedge Fund Outlook 2016, eVestment, the fund intelligence group, said that all of the larger investment firms that participated reported rising assets, while two-thirds of mid-sized firms did so as well. The eVestment report forecasts a positive year for the hedge fund industry with an additional $50 to $60 billion of assets coming into the market.

Don Steinbrugge, founder and Managing Partner of consulting group Agecroft Partners, said in an industry report that despite the negative stories and recent high-profile fund closures, he still expects total industry assets to reach a new all-time high in 2016, rising by $210 billion, which would represent a 7% increase.

Steinbrugge also believes there is an important role for smaller managers to play, with industry conditions expected to favour them in 2016. This is due to greater volatility and more emphasis on stock selection and generating alpha for returns, now that the broad market-led, beta gains are harder to come by.

“Since 2009 there has been a high concentration of hedge fund investment flows to the largest managers with the strongest brands, which has caused many of these managers’ assets to swell well past the optimal asset level to maximize returns for their investors,” Steinbrugge said. “As they become larger, it is increasingly difficult for large, multi-billion dollar funds to add value through security selection. Additionally, large fund managers are often stewards of capital for many large pension clients and are thought of as ‘safe hands’ by risk adverse investment committees. They have an incentive to reduce risk in their portfolio in order to maintain assets and thereby increase the probability of continuing to collect large management fees.”

Going back five years, he said, a hedge fund needed to have billions of dollars of assets under management before it would be considered by pension funds. Today that is thought to have declined to $750 million and falling, which Steinbrugge said will have a very positive impact on the industry.

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Category: Finance, Financial Services