New hedge fund launches rose at year end 2012, narrowly trailing total launches for 2011 as total hedge fund industry assets increased to a record of USD2.25trn, according to the latest HFR Market Microstructure Industry Report.
New launches totalled 284 in Q4 2012, representing the second highest quarter for 2012, while the full year total of 1,108 launches was in line with the 2011 total of 1,113 launches.
Hedge fund liquidations also rose, with 238 funds liquidating in Q4 2012 and 873 funds for the full year 2012, the highest since over 1,000 funds liquidated in 2009. Liquidations in 2012 were concentrated in equity hedge, with over 300 funds liquidating in the strategy. Launches were distributed across macro, relative value and equity hedge strategies.
Index performance dispersion narrowed slightly over 2011, but with substantial improvement in the performance of the top decile of HFRI constituents. The top decile of all HFRI constituents posted an average gain 32.6 per cent for 2012, increasing from the record low of 19.5 per cent from 2011. The performance decline of the bottom decile narrowed to 16.0 per cent from the 2011 decline of 30.7 per cent, creating a top bottom decile dispersion of 48.6 per cent for 2012. The HFRI Fund Weighted Composite Index gained 6.4 per cent in 2012, versus a disappointing decline of 5.25 per cent from the prior year.
Management and incentive fees declined industry wide, with average management fees falling by 1 bps to 1.56 per cent, while average incentive fees fell to 18.54, a decline of 17 bps for 2012. Fee data shows a mixed trend by vintage year of launch, with funds launched in 2012 charging an average management fee of 1.62, an increase of 1 bps over the prior year; average incentive fees for 2012 launches fell from 18.08 to 17.74 per cent.
Leading service providers increased market share over the past year, with Goldman Sachs, JP Morgan and Credit Suisse posting gains in Prime Brokerage, while GlobeOp and Citigroup gained market share for Administrators. The law firms of Shulte, Roth and Zabel and Seward & Kissel both experienced market share gains, while PricewaterhouseCoopers and Ernst & Young remained the top choices for Audit firms.
“Despite total industry assets increasing to a record level, the capital raising environment continued to be challenging for emerging managers, including both small and mid-sized funds, as well as newly launched funds. While emerging manager performance has been strong, the bulk of the capital raised in the past two years has been allocated to the industry’s most well-established firms,” says Kenneth J Heinz, president of HFR. “In order to raise new investor capital, hedge funds must not only demonstrate both superior performance and an innovative strategy, but also increased organisational efficiencies of competitive fees, transparent structures, sophisticated risk management and satisfaction of extensive institutional due diligence processes. With equity markets at record valuations and historically low fixed income yields, investors are continuing to actively allocate to hedge funds across different strategies and capitalizations, as these powerful trends drive capital flows through mid-2013.”