The number of new hedge fund launches fell again in 2014, the third consecutive year of decline, while fund liquidations saw their first drop since 2010, according to the latest HFR Market Microstructure Industry Report.
Hedge fund launches totalled 1,040 for 2014, a decline of 20 funds from the 1,060 funds launched in 2013. While launches have trended in a narrow range in recent years, they remain well below the peak of 2,073 funds launched in 2005, though nearly double the local trough of 659 launches in 2008.
Hedge fund liquidations also declined as 864 funds closed in 2014, a decrease from the 904 fund liquidations in 2013. Prior to 2014, hedge fund liquidations had risen steadily since 2010 when 743 funds closed. The average asset size of funds liquidated in 4Q14 was approximately USD76 million one year prior to closing.
Hedge fund performance dispersion declined in 2014, with the average performance of both the top and bottom HFRI decile falling from the prior year. While the HFRI Fund Weighted Composite Index (HFRI) gained +3.00 per cent in 2014, the top decile of all HFRI constituents gained +27.37 per cent for the year, down from +41.6 per cent in 2013. The bottom decile of the HFRI posted an average decline of -19.53 per cent in 2014, slightly below the bottom decile decline of -18.93 per cent in 2013. The 46.9 per cent dispersion between the top and bottom deciles of the HFRI is the lowest calendar year dispersion since HFR began tracking this statistic in 2000.
Hedge funds with AUM greater than USD1 billion posted an average gain of +5.03 per cent in 2014, in-line with the average mid-sized fund (USD250 million – USD1 billion) gain of +5.16 percent. Funds with assets between USD50-USD250 million gained +3.66 per cent while the industry’s smallest funds (less than USD50 million) posted a gain of only +2.11 percent. Funds with USD1 billion have outperformed other AUM tiers on an annualised basis for the past three-, five-, and ten-year periods.
The overall industry average management and incentive fees fell from the prior year, although fees for the vintage of 2014 fund launches rose over the prior year. Average management fees industry wide declined by -3 basis points in 2014 to 1.51 percent, while average incentive fees declined -40 basis points over the prior year to 17.8 per cent. Funds launched in 2014 had an average management fee of 1.57 percent, an increase from the 1.42 per cent of 2013 but in-line with prior years. Similarly, the vintage of funds launched in 2014 had an average incentive fee of 17.35, an increase from the 16.99 from 2013, but the second lowest incentive fee by launch year since 2003.
“Despite the global hedge fund industry having grown to a record capital level of USD2.85 trillion, the competitive environment to launch new funds continues to be challenging, and funds which fail to perform are vulnerable to investor redemptions and, ultimately, closure,” says Kenneth J Heinz, President of HFR. “In order to be successful, new hedge fund launches must offer compelling, innovative strategies, favourable liquidity and fee terms, top quality structures and services providers, and most importantly, generate strong realised performance. New funds which are able to meet these demanding requirements are likely to emerge as a new generation of industry leaders that drive performance gains and industry capital growth in coming years.”
