New hedge fund launches exceeded liquidations on a quarterly basis for the first time in over two years, as improved investor risk tolerance and declining costs drove total hedge funds industry capital to a record USD3.16 trillion in Q3 2017.
New fund launches totalled 176 in the quarter, narrowly exceeding the 170 launches recorded in same quarter last year and bringing the year-to-date (YTD) total to 545 funds, according to the latest HFR Market Microstructure Report, released today by HFR, the established global leader in the indexation, analysis and research of the global hedge fund industry.
At the same time, the number of liquidations fell sharply in the period to 137, representing a steep and favourable decline over both the prior quarter’s total of 222, as well the 252 liquidations in Q3 2016. Year-to-date to 30 September, there were 618 liquidations and 545 launches, a substantial narrowing over FY 2016, when 1,057 funds liquidated and 729 were launched.
The HFRI Fund Weighted Composite Index has gained 7.6 per cent YTD through November and has posted 13 consecutive months of performance gains. The HFRI Equity Hedge (Total) Index leads main strategy performance with a YTD return of +12.0 per cent, while the HFRI Emerging Markets: India Index and the HFRI EH: Healthcare Index each lead regional and sub-strategy performance, with gains of 29.3 and 17.6 per cent, respectively.
Average hedge fund management fees were essentially unchanged from the prior quarter at 1.45 per cent, though the average incentive fee fell 10 bps to 17.1 per cent. The average management fee for funds launched in the first three quarters of 2017 was 1.37 per cent, representing a slight increase over the 1.31 per cent management fee for 2016 launches. However, the average incentive fee for funds launched in the first three quarters of 2017 declined to 16.8 per cent, representing a drop of nearly 60 bps from 2016 launches. As reported previously, HFR estimates that only approximately 30 per cent of all hedge funds currently charge equal to or greater than a 2-and-20 fee structure.
HFRI performance dispersion continued to contract in Q3 2017, though the average performance of both the top and bottom deciles increased. The top decile of hedge funds gained an average of 11.4 per cent, while the bottom decile declined 5.6 per cent (a dispersion of 17. 0 per cent), representing an improvement from +10.1 and -8.3 per cent, respectively, in Q2 2017 (18.4 per cent dispersion). Over the trailing 12-month period ending Q3, the top decile of funds averaged a +30.5 per cent return, while the bottom decile fell an average of -14.0 per cent, a one-year performance dispersion of 44.5 per cent.
“2017 has been a recovery year for the hedge fund industry from 2016, with improved performance, exciting strategy expansion and lower costs driving new fund launches and total industry capital to a new record,” says Kenneth J Heinz (pictured), President of HFR. “We had anticipated a continuation of this favourable trend in new launches which we expect to continue with the added tailwind of growth not only from Risk Parity and Risk Premia strategies, but also from funds focused on Asian and Emerging Markets, Technology, Healthcare and Activist, as well as from managers specialising in Blockchain and Cryptocurrency investing. This powerful industry evolution and growth trajectory is very likely to accelerate in H1 2018.”