New Hedge Fund Launches Increase for First Time in a Year During Q1

After $100 billion of redemptions in 2016, some signs of optimism build for hedge fund industry.

Signs of relief for the hedge fund industry continue to mount.

New hedge fund launches increased for the first time in a year during the first quarter of 2017, according to the latest findings by research firm HFR, while liquidations declined narrowly over the same time frame. Both management and incentive fees continued to edge down over the period. And despite being plagued by concerns over performance and fees, total hedge fund industry capital increased to a record $3.07 trillion in the quarter, surpassing the previous record of $3.02 trillion from the prior quarter.

“Hedge fund launches saw an uptick to begin 2017, as total industry capital extended above the $3 trillion milestone, investor risk tolerance increased, and expectations for near-term financial market volatility declined,” Kenneth J. Heinz, president of HFR, said in a statement. “The recent increase in launches and moderation in liquidations is consistent with the trend of fee structures evolving to meet institutional investor demands and requirements. It is likely these trends will remain central to industry growth for the balance of the year.”

New hedge fund launches totaled 189 in Q1, up from 153 in the prior quarter and the highest level since Q12016. Hedge fund liquidations fell to 259 in the period, down from 275 in the prior quarter. For the one-year period ending Q1 2017, 712 new funds were launched, while liquidations totaled 1,025.

Average hedge fund management and incentive fees edged down in the quarter. The average management fee fell by 1 basis point (bp) to 1.47%. The average incentive fee fell 10 bps to 17.3%. For funds launched in Q1, the average management fee increased to 1.4%, up slightly from 1.3% for 2016 launches. The average incentive fee for funds launched in Q1 fell to 17.1%, down 30 bps from 2016 fund launches. 

Approximately 30% of all hedge funds currently charge management and incentive fees equal to or greater than 2% and 20%, respectively, HFR estimates.

Performance dispersion—the difference in performance among funds—fell slightly in Q1. The top decile of hedge funds gained an average of 14.1%, while the bottom decile declined 7.0% for a dispersion of 21.1%. That represents a modest decline from 13.7% gains and -10.1 % declines—or 23.8% dispersion—inQ4 2016.. Over the trailing 12-month period ending Q1, the top decile of funds averaged a 36.5% return, while the bottom decile fell an average of 13.8%, a one-year performance dispersion of 50.3%. 

Research firm eVestment, meanwhile, reported that investors allocated $10.5 billion to hedge funds in May, bringing YTD totals up to $23.3 billion in its latest performance and asset flow data. The allocations come on the heels of seven consecutive months of positive performance for hedge funds, which are now up 3.2% YTD as of May. 

The inflows for the year follow a harsh 2016 that saw more than $100 billion in outflows, according to eVestment. The fourth quarter of 2016 saw the largest quarterly outflow from the industry since Q1 2009, during the financial crisis, in a sign of mounting investor frustration.

But hedge funds still trail the benchmark S&P 500 index, which ended May with gains of 8.5%. And the rise in fund formations amid signs of renewed investor interest may hamper returns for the industry. An overcrowded industry with too many firms pursuing similar trading strategies and arbitraging away each other’s returns has been a chief concern among hedge fund investors.

A rise in funds and decline in liquidations among sparks of investor interest could forestall the much-needed culling investors often say is needed.

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