Hedge funds close at record number in 2016 since peak of financial crisis

According to the HFR Market Microstructure Report released by Chicago-based Hedge Funds Research, a total of 1,057 hedge fund companies were liquidated in 2016, falling short of 1,471 liquidations listed in 2008 and surpassing the closures in 2009 by 34.

The total number of hedge funds set up in 2016 also fell to 729, a sharp decline in comparison to 968 firms launched in 2015.

The sharp rise in the number of hedge fund closures stands in contrast to the industry capital exceeding the $3tn (£2.4tn) milestone in the fourth quarter of 2016.

In a study conducted by the Wells Fargo Investment Institute that was reported by CNBC, hedge funds have typically witnessed a lower performance during periods of quantitative easing. However, this trend is likely to change as the federal reserve has announced another rate hike of 0.25 basis points since the previous increases in 2015 and 2016. The interest rates are expected to increase a further two-fold this year.

This signals an improvement in the health of the American economy and entails stronger economic growth, higher inflation, greater yields from fixed income positions, and a rise in global trends of equities and credit. Hedge funds can thus look forward to a better year in 2017 as investors adjust their risk appetite.

Kenneth J Heinz, president of HFR, stated in a press release, "Hedge fund liquidations in 2016 surpassed the post-Financial Crisis peak despite total industry capital surpassing the $3 trillion milestone, underscoring the shifting investor risk tolerance and steadily increasing concentration of investor capital in mid-to-large hedge fund firms.

"The hedge fund industry fee structure continues the process of evolving to meet increased investor demands, as well as persistently low, albeit increasing, level of interest rates. Continuation of the process of macroeconomic normalization is likely to drive strong performance across a wide range of strategies in 2017."