Kenneth J Heinz, President of HFR

Hedge fund launches outpace liquidations as industry assets reach record level, says HFR

New hedge fund launches in the second quarter of 2011 totalled 280, a slight decline from the 298 new funds that were launched in the first quarter, according to data released today by HFR in the latest edition of Market Microstructure Report: 2Q11.

 

The first half launch total of 578 was the strongest six months since the first half of 2007, as total hedge fund industry capital reached a record level of USD2.04 trillion. Fund liquidations in 2Q totalled 191, a slight increase from the 1Q total of 181; the liquidation total for the second quarter represents an attrition rate of 2.07 per cent.

Investors exhibited a preference for direct investment in single-manager vehicles, as opposed to commingled fund of funds (FOF). Single-manager launches accounted for 245 of the launches in 2Q11, the highest level since 2Q07, while FOF’s experienced a net decline, with 53 liquidations and only 35 new launches.

Both management and incentive fees charged by hedge funds declined in 2Q, with incentive fees posting a more significant decline. Average incentive fees industry-wide declined to 18.81 per cent in 2Q (from 18.95 per cent in Q1); however, the average incentive fees of funds launched in the trailing 12 months was 17.56 per cent, the lowest level since 2005. Average hedge fund management fees posted a narrow decline of 1 bp to 1.57 per cent, while FOF management fees were unchanged at 1.3 per cent.

Performance dispersion between best and worst performing deciles of funds in the trailing 12 months rose to nearly 61 per cent, reversing a trend of narrowing dispersion from prior quarters when volatility declined. The top performing decile gained an average of 48.2 per cent over the trailing 12 month period, while the bottom decile declined by 12.7 per cent.  Recent performance dispersion represents an increase over prior quarters, however this remains well below the peak of over 116 per cent observed in 2009.

“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 J Heinz, President of HFR. “While lower fees continue to be supportive of this growth trend, the evolution of fund transparency is also a significant factor driving new fund launches. As volatility has increased throughout 3Q, we expect fund launches to continue to appeal to these investor preferences, as hedge funds position for strategic growth and take advantage of tactical opportunities created by these volatile market conditions.”

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