Hedge fund launches at “historically low” levels despite Q2 recovery, but liquidations ease following Covid crash

Dollar liquidity

The rate of new hedge fund launches grew between April and June following the coronavirus-fuelled first quarter slump, as hedge fund performance recovered – but the number of new roll-outs over the past 12 months remains “historically low”, Hedge Fund Research says.

New hedge fund launches totalled an estimated 129 in the second quarter. That number was a sharp increase on Q1 which proved the highest quarterly launch total since 153 funds were rolled out in Q2 2019, according to HFR’s latest Market Microstructure Report.

But the number of estimated fund launches during the preceding four quarters reached just 404 – an “historically low” figure - stemming in part to the Covid-19 pandemic which drove down Q1’s launch total.

At the same time, the industry appears to be recovering from a spike in hedge fund liquidations, which reached a four-year high in the three-months between January and March this year. An estimated 178 funds liquidated in Q2 2020, down from 304 liquidations the previous quarter.

But just as virus volatility has driven fund launches to fresh lows, fund liquidations over the past four quarters are at an “historically high” 821.

“New fund launches rose through mid-year from historic lows in Q1 as hedge funds posted strong performance through mid-year despite the coronavirus pandemic as well as ongoing social unrest in US and the uncertainty of the upcoming US election,” said HFR president Kenneth Heinz.

“As investor risk tolerance continues to recover into the second half of the year, institutions are expecting to increase or begin implementing allocations to hedge funds as components of diversified portfolio allocation and in response to the equity and credit market volatility of early 2020.”

Heinz added: “Most institutions are positioning for elevated levels of realised volatility to continue for the foreseeable future and are interested in opportunistic exposures which both preserve capital and realise opportunities created by the uncertain macroeconomic and geopolitical environment.”

Meanwhile, HFR’s analysis indicates a fall in industry-wide management fees and incentive fees compared to the previous quarter. Management fees declined one basis point to 1.37 per cent while incentive fees declined 3 basis points to 16.37 per cent in Q2 2020, respectively - the lowest level for both fees since HFR began publishing fee data.

For funds launched in Q2 this year, the average management fee was an estimated 1.27 per cent, an increase from the Q1 average of 1.14 per cent, and the highest fee for new launches since 1.32 per cent in Q3 2018. Meanwhile, the average incentive fee for funds launched in Q2 was an estimated 17.55 per cent, also representing an increase from the prior quarter’s estimated 17.16 per cent incentive fee.