While hedge fund liquidations fell steadily over 2009, the first quarter of this year saw closures begin to rise again with funds of funds bearing the brunt of the pain, according to the latest figures from Chicago-headquartered Hedge Fund Research.

According to HFR’s Market Microstructure Industry Report, 240 funds closed in the first quarter of this year and this trend was disproportionately skewed towards funds of funds, with 102 such vehicles closing during the period. This marked the seventh consecutive quarter in which FOF liquidations have exceeded new launches.

Meanwhile, Hennesse, another tracker of hedge fund performance, said the sector suffered losses averaging 2.99 per cent, the worst monthly loss since October 2008 when the credit crisis reached its height.

HFR also notes that the level of leverage used by hedge funds continues to be moderate when compared to five years ago; almost seventy per cent of all the funds examined by the firm, which manage eighty-three per cent of the industry’s capital, use some kind of leverage, the firm said.

HFR further found that relative value arbitrage and macro strategies are typically employing higher levels of leverage than event driven and equity hedge strategies. There was also a high degree of variation in the use of leverage across funds of different size – while over half of all funds typically employ between 1 and 2 times their investment capital, in the larger funds this was much greater. It was found that close to 30 per cent of those funds larger than $1 billion use leverage over two times their investment capital.

As has been well-noted, following the widespread losses suffered by hedge funds during 2008  investors are now empowered to demand more attractive terms and this was borne out by HFR’s analysis of prevailing trends in incentive fees. Over the first quarter of this year average incentive fees fell by 8 basis points to 19.12 per cent, their sharpest fall since the second quarter of 2009. However, average management fees held steady, remaining at 1.58 per cent for Q1 2010.

“Both investors and fund managers are continuing to exhibit a heightened sensitivity to leverage and risk, even with the benefit of the performance recovery from 2009,” said Ken Heinz, president of HFR.

“Managers are employing lower levels of leverage in response to higher realized asset volatility and higher costs of obtaining leverage, as well as investor preference for a less volatile return profile.”