In this exclusive excerpt from Preqin's forthcoming 2016 Global Hedge Fund Report, due out in January, we take a closer look at how the hedge fund industry has changed over the course of 2015.
In this exclusive excerpt from Preqin's forthcoming 2016 Global Hedge Fund Report, due out in January, we take a closer look at how the hedge fund industry has changed over the course of 2015. Drawing on data taken from Preqin's award-winning Hedge Fund Analyst database, we examine in more detail fund launches and closures over the course of the year so far and which strategies and sectors have been successful, as well as those that have had a difficult 2015.
Number of funds and industry capital
In terms of the number of funds, equity strategies funds are the most prominent strategy in the single-manager hedge fund industry; 42 per cent of all hedge funds utilise an equity-focused approach (Fig 1). Although more than four in 10 hedge funds employ equity strategies, these funds hold only 25 per cent of industry capital. A large proportion (65 per cent) of equity strategies funds have assets of less than $100mn; equity fund managers often have a less scope for scaling their strategies, with greater footprints on trades and often operate in smaller or niche markets and are unable to grow beyond a certain level without compromising fund returns. This issue is less pronounced in other strategies where managers have access to more diverse and often deeper markets and can more effectively manage the vast quantities of capital possessed by the largest funds.
After equity strategies, all other core strategies command a fairly even distribution of funds. Macro strategies funds capture a larger proportion (29 per cent) of industry capital than any other strategy. This is, in part, due to the two largest hedge funds in the industry utilising a macro strategy; combined, Bridgewater's All Weather Strategy and Pure Alpha Strategy manage assets in excess of $168bn, representing more than 5 per cent of all capital invested in hedge funds today.
Fund launches and closures
Fig 2 shows the number of new hedge funds launched in each year and fund closures since 2012, and Fig 3 depicts the breakdown of these funds by the core strategy they employ. A trend of steady growth within the industry occurred from the mid-1990s to 2012, when the industry hit a peak in terms of new funds entering the space. The period 2011-2013 represented three consecutive years when more than 1,200 new funds launched each year (Fig 2). This spike in new funds entering the market came as the reality of the post-global financial crisis (GFC) world set in, when new regulations such as the Volcker Rule severely cut into prop-trading businesses and resulted in traders leaving banks to start hedge funds of their own.
However, the rate of new launches has fallen over the past two years. In 2014, 1,079 new funds were launched, the lowest number since 2009, and 656 funds formed in 2015. Although the number of funds launched in 2015 is expected to increase as more data becomes available in 2016, Preqin estimates that the final number of launches will be the lowest since 2008, when 891 funds were incepted.
Market uncertainty in 2015 – stemming from events such as the unpegging of the Swiss franc in January, falling commodity prices, volatility in Chinese markets and hesitancy by the US Federal Reserve – proved too challenging for some hedge funds and the industry saw over 560 fund closures over the course of the year. As more data becomes available in early 2016 this figure is likely to increase. The hedge fund industry has become increasingly crowded in recent years; this coupled with much of the capital inflows going to the largest funds has resulted in an increasingly competitive marketplace, especially for small funds. A drop in the number of funds being incepted in 2015, together with fund liquidations, meant the single-manager sector grew by a net increase of only 60 funds in 2015, compared with 343 in 2014. This decline in the growth of the industry by number of funds, coupled with continued net inflows into hedge funds, may help reduce the number of fund managers focusing on growing existing products in 2016.
Macro strategies face difficulties while equity strategies preferred
Macro strategies hit the headlines in 2015 with notable vehicles such as Fortress Investment Group's flagship macro fund and Blackrock's Global Ascent fund returning capital to investors. In fact, there were more fund liquidations (63) in the macro strategies sector than there were new funds launched (58); see Fig 4. Even harder hit were relative value strategies funds and CTAs, with a net decline of 19 and 20 funds respectively as a result of closures of in each sector.
Equity strategies funds represent the largest share (44 per cent) of funds incepted in 2015 (Fig 4). This continued a trend of growth in equity strategies funds, which have seen a steady increase in the proportion of fund launches since 2009, when they hit a low following the GFC. Although big-name macro fund closures attracted the most attention, equity strategies funds accounted for the largest number of fund closures, largely as a result of the strategy's existing prominence in the industry (Fig 5). However, more funds launched in this sector than closed, and in 2015 the number of equity strategies funds grew by 46.
Second to equity strategies, credit strategies funds represent 12 per cent of funds launched in 2015. Credit funds increased in prominence following the GFC, and this has been sustained, with the need for alternative lenders in the credit space still evident as banks continue to clean up their balance sheets. The credit strategies sector showed the largest net growth in terms of funds over 2015: 77 funds launched over the year compared with 29 funds liquidating, resulting in a net growth of 48 credit strategies funds. However, the landscape may change further for credit strategies funds over the next 12 months with the impending tightening of monetary policy by the major central banks.
Event driven launches form less than 10 per cent of the industry in 2015
Launches of event driven strategies have fallen slightly in 2015 compared to 2014, representing 8 per cent of new entrants over 2015 compared with 9 per cent in 2014. In four of the five years between 2005 and 2010, event driven strategies represented more than 10 per cent of all launches in each year. However, since 2010, event driven strategies have failed to exceed 9 per cent of fund launches in any single year. Event driven strategies was the worst performing hedge fund strategy in both 2014 and 2015; fund managers in turn are seeing fewer opportunities in this space and we are seeing less new event driven strategies funds come into the market than in previous years. However, despite performance problems, relatively smaller numbers of event driven funds closed over 2015, resulting in a net growth by number of event driven strategies funds of 17, behind credit strategies (48) and equity strategies (46).
