Hedge fund liquidations outpace launches in 2020, as fees fall to record lows

trading data

New hedge fund launches have slumped to lows not seen since the 2008 global financial crisis, while liquidations hit their highest level since the end of 2015, according to new analysis from Hedge Fund Research.

HFR’s ‘Market Microstructure Report’ for the first quarter of 2020 also reveals that management fees and incentive fees have dropped to their lowest amount since HFR began compiling such data, reflecting the rapidly shifting balance between hedge fund managers and investors.

As hedge fund firms grappled with the impact of the coronavirus pandemic which upended global markets earlier in the year, sending volatility soaring and heightening investor aversion, the numbers show that Q1 2020 was the seventh consecutive quarter in which liquidations outnumbered launches.

Altogether, there were an estimated 84 new hedge fund strategies rolled out in the first quarter of 2020 - the lowest quarterly launch estimate since Q4 2008, during the height of the Global Financial Crisis.

Despite surging volatility compared to the final quarter of 2019, the Q1 2020 launch total was only slightly down from the estimated 89 funds unveiled the previous quarter.  The total number of new hedge fund launches annually in 2019 reached 480.

At the same time, liquidations reached an estimated 305 in the first three months of the year, the highest liquidation total since Q4 2015, and an increase of over 50 per cent from the 198 liquidations the previous quarter. An estimated 738 funds were liquidated for the full-year in 2019.

Commenting on the data, HFR president Kenneth Heinz said new fund launches tumbled to “historic lows” during Q1 as the pandemic drove losses across global financial markets, despite strong outperformance of HFR’s hedge fund indices throughout the period.

“While the launch environment to begin 2020 has been extremely challenging as a direct result of the drop in investor risk tolerance, institutional allocators which had reduced, eliminated, or failed to implement hedge funds or other risk-reducing alternative allocations were subjected to higher levels of portfolio volatility,” Heinz observed.

The study also probed shifting patterns in hedge fund fee models, with both management and incentive fees falling to their lowest level since HFR began publishing these estimates.

It found that the average industry-wide hedge fund management fee and incentive fee each declined by 1 basis point from the prior quarter, falling to 1.38 per cent and 16.40 per cent, respectively, in Q1.

For funds launched in the first three months of this year, the average management fee was around 1.14 per cent, down from 2019’s average of 1.22 per cent.

The average incentive fee for funds launched in Q1 was an estimated 17.16 per cent, also down from 2019’s estimated 17.44 per cent fee.

But as markets reach their mid-year point, Heinz sounded a note of optimism looking ahead to the rest of 2020.

“As financial markets adjust to heightened levels of volatility over the intermediate term, we expect interest from forward-looking institutional investors to drive a more favourable launch environment through H2 2020,” he said.