(May 21, 2014) — Some of the smallest hedge funds are under threat of “extinction” due to rising regulatory costs and a rebellion against high performance fees, according to the latest Eurekahedge report into the sector.
The report reveals evidence of an increasingly concentrated hedge fund industry as star managers and established funds rake in assets at the expense of smaller players.
Portfolios of less than $500 million have seen their market share fall from 41% in 2005 to 28% at the end of 2013, Eurekahedge said. In particular, the report highlighted funds with less than $100 million of assets as struggling more than ever to accumulate new investor capital.
“Activity in this fund size category has been largely sustained through new fund launches and brave performance-based gains delivered by managers,” the report stated.
“A downward squeeze on hedge fund performance fees and rising regulatory costs in the industry, coupled with an increasing investor bias towards the larger hedge funds which have a long track record in the industry, appears to suggest that the smaller start-ups are on the path to extinction.”
The report added that outflows from investors liquidating their holdings had been “a constant drain” on the assets of funds in $100 million to $500 million category.
In March research firm HFR reported that new hedge fund launches fell to 1,060 in 2013, the lowest figure since 2009, while closures climbed to 904, the highest level in four years—although this is still a net expansion of 156.
In contrast, hedge funds with more than $1 billion in assets dominate the sector more than ever, responsible for more than half—52%—of total assets, Eurekahedge said. These funds have added $28.9 billion in assets through fresh inflows and another $11.7 billion through positive performance so far this year.