Hedge fund launches and liquidations both declined in the second quarter, as hedge funds posted steady gains through a volatile quarter, driven largely by the Brexit vote.
New hedge fund launches totalled 200 in Q2 2016, down slightly from 206 in the prior quarter and 252 in Q2 2015, according to the latest HFR Market Microstructure Report.
Hedge fund liquidations totalled 239 in Q2 2016 compared to 291 in the prior quarter and 200 liquidations in 2Q 2015.
Liquidations exceeded launches for the third consecutive quarter, but the recent data shows the narrowest margin of contraction (39 funds) of the trailing three quarters. In the first half of 2016, the 530 fund liquidations exceeded the 406 new fund launches, with liquidations on an annual pace for the second-largest total since HFR began tracking this data in 1996.
At the current pace, launches would also represent the lowest new launch total since 2009, when 784 funds were started. As previously reported by HFR, total hedge fund industry capital as of mid-year was USD2.898 trillion, approximately 2.4 per cent below the record USD2.969 trillion from Q2 2015.
Average industry-wide fees were unchanged from the prior quarter, although new fund launches reflected declining fees. The overall average hedge fund management fee remained at 1.50 per cent as of 2Q, while the average incentive fee stood at 17.6 per cent. However, the average management fee of new launches fell to 1.45 per cent, down from 1.48 per cent the prior quarter, while the average incentive fee of new launches declined to 17.89 per cent, representing a 61 bps decline from Q1 2016.
HFRI performance dispersion declined in Q2 as returns for both the top and bottom deciles rose over the prior quarter. The top decile of HFRI performance gained an average of 13.7 per cent in the quarter, while the bottom decile declined 7.6 per cent, expanding from averages of +12.1 and -13.2 per cent, respectively, in Q1 2016.
Over the last four quarters, dispersion declined slightly compared to calendar year 2015, as the top HFRI decile gained 19.3 per cent, while the bottom decile fell an average of 25.8 per cent, a dispersion of 45.1 per cent. This represents a narrow decline from the FY 2015 HFRI performance dispersion of 45.5 per cent.
Small and mid-sized hedge funds (AUM below USD1 billion) have outperformed larger, established managers (AUM above USD1 billion) in both 2Q and YTD 2016.
The HFRI Fund Weighted Composite Index gained 1.8 per cent in 2Q16, contributing to a YTD gain of 3.5 per cent through August, topping the MSCI World Index over the same period, as well as the HFRI Asset Weighted Composite Index, which has gained 0.5 per cent YTD.
Funds with AUM below USD1 billion gained 1.85 per cent in 2Q and 3.6 per cent YTD through August, while funds with AUM greater than USD1 billion gained 1.55 per cent in Q2 and 2.1 per cent YTD.
“The number of launches narrowly declined though average launch size rose, while liquidations fell from elevated levels of the prior two quarters, though remained at a historically high level in 2Q as hedge funds produced steady gains through mid-year,” says Kenneth J Heinz (pictured), president of HFR. “The current ultra-low interest rate environment continues to be challenging for new fund launches, with intense competition to differentiate strategies, while fees remain a critical focus for investors. In this environment, hedge funds, regardless of size or maturity, which are able to differentiate their strategies with compelling performance and competitive terms, are likely to attract new investors capital and lead industry growth in 2H16.”
