HFR’s Market Microstructure report reveals that hedge fund launches declined in the third quarter, as funds again posted steady gains following the Brexit vote and leading into the surprise US P
HFR’s Market Microstructure report reveals that hedge fund launches declined in the third quarter, as funds again posted steady gains following the Brexit vote and leading into the surprise US Presidential election results.
New launches totalled 170 in 3Q 2016, down from 200 in the prior quarter and 269 in 3Q15. The number of launches in 3Q16 represents the lowest since 1Q09 and marks the fourth consecutive quarter of net contraction in the overall number of active funds. A total of 576 funds has launched in the first three quarters of 2016, a decline of over 200 from the 785 launches over the same period last year.
Hedge fund liquidations also increased in 3Q16, rising to 252 from 239 in the prior quarter, though nearly identical to the number of funds closed in 3Q15, when 257 funds liquidated. Through the first three quarters of 2016, liquidations totalled 782, which is on pace for the highest number of liquidations since the financial crisis.
However, total hedge fund industry capital increased to a record of USD2.979 trillion through 3Q16, surpassing the previous record of USD2.969 trillion in 2Q15. The total number of hedge funds, including fund of hedge funds, declined to 9,925, falling below 10,000 funds for the first time since 2014.
Average industry-wide fees posted narrow declines from the prior quarter, although fee data was mixed on new fund launches. The overall average hedge fund management fee fell to 1.49 per cent as of 3Q, a drop of 1 basis point (bps), while the average incentive fee declined 10 bps to 17.5 percent. Average management fee for funds launched in 2016 was a similar 1.48 per cent, declining from 1.6 per cent for 2015 launches. The average incentive fee for the vintage of funds launched in 2016 increased to 18.8 per cent, up over 100 bps from 17.75 per cent for 2015 launches.
HFRI performance dispersion was steady for 3Q though returns for both the top and bottom deciles rose over the prior quarter. The top decile of HFRI performance gained an average of +14.77 per cent in the period, while the bottom decile declined -7.05 per cent, increasing from averages of +13.74 and -7.6 per cent, respectively, in 2Q16. Over the last four quarters, the top HFRI decile gained +29.54 per cent, while the bottom decile fell an average of -15.57 per cent, a dispersion of 45.1 per cent, in line with FY 2015 dispersion.
Small and mid-sized hedge funds (AUM < USD1 billion) outperformed larger, established managers (AUM >= USD1 billion) for 3Q, but the performance differential narrowed YTD 2016. Funds with AUM below USD1 billion gained +3.0 per cent in 3Q and +4.7 percent YTD, while funds with at least USD1 billion AUM advanced +2.5 per cent in 3Q and +3.8 per cent YTD. The HFRI Fund Weighted Composite (FWC) Index gained +3.0 per cent in 3Q16, contributing to a YTD return of +4.6 per cent through November, topping the MSCI World Index over the same period. The HFRI Asset Weighted Composite (AWC) Index recovered losses through mid-year by gaining +2.2 per cent in 3Q and is now +1.9 per cent YTD through November.
“The total number of hedge funds has declined from its peak in 3Q 2015, even as industry capital has risen to record levels, with a large component of the recent consolidation occurring within the fund of hedge funds (FOF) space. Over the last year, as total industry capital increased by +3.4 per cent, the number of single-manager hedge funds declined -2.5 per cent, while the number of FOFs fell by -6.6 per cent,” says Kenneth J. Heinz, (pictured) President of HFR.
“As a result of the overall increase of industry capital during this period of fund consolidation, the size of the average hedge fund has continued to rise, suggesting that investors are becoming more comfortable and willing to allocate to innovative, emerging managers as a complement to more established holdings. Investor risk tolerance has increased significantly since the US election, this combined with continued macroeconomic uncertainty and favourable political policy evolution is likely to drive industry growth into early 2017.”