Hedge fund launches exceed liquidations, HFR data shows

Date: Thursday, September 15, 2011
Author: Charles Gubert, COO Connect

Hedge fund launches continued to outpace liquidations during the second quarter of 2011, according to data from the Chicago-based Hedge Fund Research (HFR).

There were 280 new launches during the quarter bringing the total number of hedge funds launched to 578 this year – the strongest six months since 2007. Hedge fund assets under management (AUM) also reached a new milestone exceeding the $2 trillion mark. Total AUM currently stands at $2.04 trillion. There was a marginal increase in liquidations during the second quarter with 191 funds shutting their doors compared with 181 in the previous quarter.

“The first half of 2011 was a strong environment for new hedge fund launches with the industry on pace to approach the full year total of nearly 1,200 launches in 2007,” said Kenneth Heinz, president of HFR.

Investors still prefer making direct investments into single manager vehicles as opposed to funds of hedge funds (FoHFs). FoHFs experienced a net decline with 53 liquidations and only 35 new launches. FoHFs have yet to recover from 2008 when many endured torrid performances or had the misfortune of being invested into Bernard Madoff among other high-profile frauds. However, unlike many of the FoHFs’ doom-mongers, Heinz is optimistic about their future.

“I do not think the decline in FoHFs is going to continue,” said Heinz. “I speak to a lot of FoHFs and the business model is evolving in the sense that there is more transparency than before. However, some investors are trying to cut down costs and are questioning the value add of FoHFs. Nevertheless, I suspect FoHFs will start to recover over the next three or four quarters,” he added.

Fees also continued to drop with the average incentive fee falling quite significantly between quarters from 18.95% to 18.81%. The average incentive fee for funds launched in the past year was 17.56%, which is the lowest level since 2005. Hedge fund management fees posted a narrow decline of 1 basis point to 1.57% while FoHFs’ fees remained unchanged at 1.3%.

“There is a major difference between managers with a proven track record who can charge the traditional 2 and 20 and those that don’t have that record so cannot. It is difficult to answer whether fees will continue to decline or not. We are in very choppy and volatile markets and if these persist, it will be harder for managers to justify increasing incentive fees. However, if markets improve, I suspect fees will stabilise and it is unlikely fees will decline further,” said Heinz.

Performance dispersion between the best and worst performing deciles of funds rose to nearly 61% reversing the narrowing dispersion from previous, less volatile quarters. The top performing decile gained 48.2% over the last 12 months while the bottom decile dropped 12.7%. The performance dispersion is still – nevertheless – well below the 116% peak in 2009.