A higher number of hedge funds will shut up shop this year, experts at Barclays Capital predict, while new launches are set to be few and far between.

The bank’s prime services division, which offers a suite of services to hedge funds, expects the launch rate to decline to 8% and the liquidation rate to rise to 12%, resulting in a net 4% decline in the number of hedge funds, i.e. 340 funds.

Perceived underperformance, controversy over fees and redemptions from large institutional investors have been the main challenges for hedge fund managers so far in 2016.

“Several established hedge funds with relatively long track records, particularly in the fundamental equity long/short space, have shuttered their doors recently in addition to the normal attrition across the less prominent, newer hedge funds,” said Louis Molinari, global head of capital solutions at Barclays Capital.

“As a point of reference, in 2008, when the industry was under severe stress, the liquidation rate increased to 21%,” he added in the paper entitled ‘Against All Odds’.

The study explains that although HFs have produced considerable excess returns since 1993, such levels have by and large plateaued since 2011, which may be at least partially due to managers’ reducing their risk appetite.

Survey respondents indicated that they believe the size of the industry and macro conditions are more likely the reasons for recent hedge fund underperformance.

Yet Barclays points out that the global stock of financial assets has reached $305tn by the end of 2015, which means that hedge fund assets still account for only 1% of total assets.

This suggests the size of the industry probably is not the issue, whereas the size of individual hedge funds may be.

Some of this underperformance by the largest managers may be attributable to the rise in crowded trades, which has increased substantially in recent years.

From the second half of 2015 onward, Barclays analysts also observed considerable underperformance on the part of larger funds relative to smaller funds, a phenomenon that affected all strategies to varying extents.

In addition, macro conditions appear to have aligned against hedge funds in recent times, as intra-stock correlation and dispersion have been at disadvantageous levels – making it challenging for hedge funds to produce alpha.

More than half of the investors surveyed by Barclays indicated that hedge funds did not meet their expectations over the last couple of years.

However, despite recent press to the contrary, the vast majority of investors polled indicated that they are not pulling back wholesale from their hedge fund allocations.

"The commitment to HFs can at least partially be explained by the positive attribution HFs seem to offer after combining their risk-adjusted returns with their low correlation to indices," analysts also wrote in the study.

"Furthermore, it appears that HFs are mitigating further underperformance by securing discounts, especially to management fees, though performance fees are discounted as well, particularly by strategies without capacity issues/netting risk."

Investors also appear keen on increasing allocations to small and new managers in search of better returns and more flexibility on fees and terms.

Based on investor input, Barclays Capital expect systematic/CTA, quant equity, distressed credit and equity market neutral strategies to attract investor interest and allocations over the next 6 to 12 months.

Conversely, event driven and equity long/short strategies appear to be the least in favour among investors at the mid-year.