LONDON, ENGLAND - OCTOBER 20: An employee views trading screens at the offices of Panmure Gordon and Co on October 20, 2014 in London, England. Markets stabilised over the weekend following global turbulence amid fears over the Ebola virus and global economic concerns. (Photo by Carl Court/Getty Images)
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The hedge fund industry continued to shrink in the first quarter of the year, as uneven performance failed to reassure clients frustrated by high fees.

While 291 hedge funds shut their doors in the first three months of 2016, just 206 new funds started up, according to data from Hedge Fund Research. Europe was the busiest region for both new funds and closures.

The figures represent a slowdown in closures from the fourth quarter, when 305 funds closed, but an acceleration from the 217 seen in the first quarter of 2015. Last year saw the most closures since 2009.

Hedge funds have come under intense scrutiny, as some clients have pulled money and complained of high fees eating into poor performance, and as presidential candidates have railed against inequality and tax loopholes. Managers have called for a cull, with Third Point’s Daniel Loeb saying the first quarter was “one of the most catastrophic periods” for the industry in two decades.

Market volatility in the first quarter caught many wrongfooted, with the HFRI Fund Weighted Composite Index declining by -0.6 per cent.

Funds have since clawed back ground, and were up 0.8 per cent for the year through May. Improving performance, combined with the expectation for more volatility from market threats including Brexit and interest rate increases by the US Federal Reserve, have helped keep clients invested.

“It’s just been a tougher environment,” said Judith Posnikoff of Pacific Alternative Asset Management Company. “It was very dark there in January. Performance has improved since January — there was that big reversal that started mid-February — so things have just been marching on since.”

The industry swelled since the financial crisis to more than $3tn, so a pullback in its assets to $2.86tn was natural, she said. “More [funds] have started, so you would just expect more to fail.”

Despite the turmoil, the average management fee held at 1.5 per cent and the average incentive fee fell just 0.1 per cent to 17.6 per cent, HFR data show.

Funds started in the first quarter had slightly lower management fees, down 0.12 percentage points to 1.48 per cent, while incentive fees ticked up 0.75 percentage points to 18.5 per cent.

The size of new funds has increased, reflecting investor trepidation around taking a chance on a new company. Managers started funds this year with a median of $16m in assets, up from $12m last year and $14m in 2014, according to Preqin data.

“The environment for new hedge funds continues to be extremely competitive with discriminating investors exhibiting low tolerance for underperformance,” said HFR’s president Kenneth Heinz. Allocators struggling to meet return targets are focusing on “near-term performance, demands for greater liquidity to accommodate more frequent rebalancing activities, and heightened sensitivity to fee structures.”

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