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Kenneth J Heinz, HFR

Hedge fund launches and liquidations decline as funds focus on trade and M&A


Hedge fund launches exceeded liquidations in Q1 2018 for the third consecutive quarter, as both launches and liquidations fell through early 2018, according to the latest HFR Market Microstructure Report, released today by HFR.

An estimated 158 funds launched in Q1 2018, down from 190 in Q4 2017, the lowest quarterly new launch total since 153 funds were started in Q4 2016.
 
Fund liquidations also declined in early 2018 after falling sharply in 2017, with 145 funds liquidating in Q1 2018, compared to 259 in the same period last year, the lowest total since Q3 2017, and the second lowest total since HFR began tracking liquidations in 2008. There were 166 liquidations in Q4 2017, and 670 for the 12-month period ending 31 March 2018.
 
The HFRI Fund Weighted Composite Index gained 1.4 per cent YTD through May 2018, offsetting a 2.3 per cent decline in late Q1, with strong gains in January and May. HFRI performance continued to be led by Equity Hedge with strong gains in Technology, Healthcare and Energy, though both Event Driven and Relative Value Arbitrage have also gained. The HFRI Equity Hedge (Total) Index was up 2.3 YTD through May, led by gain of +8.5 the HFRI EH: Healthcare Index; HFRI EH: Technology Index gained 7.9 per cent, while HFRI EH: Energy Index returned +6.1 per cent YTD.
 
Hedge fund performance dispersion slightly widened in Q1 2018, with the top decile of HFRI gaining 9.5 in Q1 2018, down from an average of 13.4 per cent in Q4 2017, while the bottom decile decline fell to -11.2 per cent, a more precipitous drop from the mild decline of 5.8 per cent in Q4. The top/bottom decile dispersion of 20.7 per cent in Q1 is up marginally from the historically tight dispersion of 19.1 per cent in Q4 2017. The rolling 12-month dispersion ending Q1 2018 totalled 40.7, which is down from the calendar year 2017 performance dispersion of 51.8 per cent.
 
Average hedge fund management and incentive fees began 2018 at the lowest level since HFR began estimating them in 2008; in Q1 2018 management fees declined to another record low while incentive fees rose slightly. Average management fees fell -1 basis point (bps) over the prior quarter to 1.43 per cent, while the average incentive fee rose 2 bps to 17.11 per cent. The average management fee for funds launched in Q1 2018 was 1.19, a decrease of -5 bps from the prior quarter and a decline of -15 bps over the calendar year 2017 launch average management fee of 1.34 per cent. The average incentive fee for funds launched in Q1 2018 was 17.2 per cent, representing an increase of +19 bps over the calendar year 2017 launch average incentive fee of 16.97 per cent, although this was down from the 17.4 per cent average from Q4 2017. As reported previously, HFR estimates that only approximately 30 per cent of all hedge funds currently charge equal to or greater than a 2-and-20 fee structure.
 
“Hedge fund industry growth has continued to record levels, with fund strategies and structures evolving as both fees and liquidity continue to influence investor allocation decisions, as investors position for challenges associated with ongoing trade uncertainty and expected higher US interest rates.” says Kenneth J Heinz (pictured), President of HFR. “Hedge fund positioning has shifted from the equity beta that dominated 2017 to more sophisticated, strategic exposures on complex and volatile themes including trade and tariff politics and economics, M&A across rapidly evolving media and telecom spaces, and exciting growth trends in Technology. These trends are likely to continue to drive hedge fund and financial market performance through mid-2018.”

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