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Kenneth Heinz, HFR

Hedge fund launches exceed liquidations for second successive quarter

Hedge fund launches exceeded liquidations in Q4 2017 for the second consecutive quarter, as total hedge fund industry capital began 2018 at a record USD3.21 trillion.

An estimated 190 funds launched in Q4, up from 176 in 3Q and in line with the number of Q416 launches, bringing the full year 2017 total to 735 fund launches, according to the latest HFR Market Microstructure Report.
Fund liquidations declined sharply in 2017 as industry asset growth accelerated, with 784 funds closing in the year, representing a decrease of 25 per cent from the 1,057 liquidations in 2016. Additionally, fund liquidations for 2017 were the lowest for a calendar year total since 775 funds liquidated in 2011. On a quarterly basis, fund liquidations totalled 166 in Q417, an increase over the 137 in the prior quarter, though representing a decline over the Q416 of 275 liquidations.
The HFRI Fund Weighted Composite Index gained +8.6 per cent in 2017 while not producing a negative month for the calendar year. Through February, the Index has added +0.6 per cent YTD 2018, with early performance led by Equity Hedge and Technology exposures. The HFRI Equity Hedge (Total) Index was up +1.1 YTD through February, while the HFRI EH: Technology Index has climbed +4.9 per cent over the two-month period.
Hedge fund performance dispersion widened in both Q417 and FY 2017, with the average of the top decile posting the highest FY gain since 2013. The top decile of hedge funds was up an average of +13.4 per cent in Q4, while the bottom decile fell -5.8 per cent, representing a dispersion of 19.2 per cent. For FY2017, the top decile of funds averaged a +38.4 per cent return, while the bottom decile fell an average of -13.4 per cent, a one-year performance dispersion of 51.8 per cent.
Average hedge fund management and incentive fees began 2018 at the lowest level since HFR began estimating in 2008. Average management fees declined -1 basis point over the prior quarter to 1.44 per cent, while the average incentive fee fell 10 bps to 17.0 per cent. The average management fee for funds launched in 2017 was 1.34 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 2017 declined to 16.97 per cent, a drop of over 40 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.
“The hedge fund industry has accelerated into 2018 with increasing launches and the fewest fund closures since 2011, as industry capital eclipsed a new record to begin the year,” says Kenneth J Heinz (pictured), President of HFR. “The prevailing financial market environment in 2018 represents a significant shift from the pro-equity environment of 2017, with transitional politics driving transitional economics, which has expanded the opportunity set for hedged, long/short investing. It is likely that investors will continue to increase allocations to hedge funds and alternative investments not only to preserve capital through these transitions but to benefit from the opportunities created.”

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