New hedge fund launches hit highest level in three years, as managers seize on growing opportunities

The number of new hedge funds being launched has reached its highest level in three years, as managers look to capitalise on the nascent economic recovery, idiosyncratic and volatility-based opportunities, and a shifting macro environment.

New hedge fund launches increased to around 175 in the fourth quarter of 2020, with the number of new funds unveiled exceeding the estimated quarterly liquidations for the second successive quarter, new industry analysis by Hedge Fund Research shows.

The number of Q4 launches was up on the previous quarter’s total of 151, bringing the estimated number of new hedge funds launched in 2020 to 539, a period which included a record low in Q1 at the start of the coronavirus pandemic, HFR said this week.

“New hedge fund launches continued to rise as industry expansion accelerated into 2021, driven by the strongest performance gains since 2000, as both managers and investors positioned for strong growth throughout 2021,” said Kenneth Heinz, HFR president.

The number of fund liquidations in 2020 hit an estimated 770, the highest level in three years when some 784 funds shuttered in 2017, and up on 2019’s total 738 liquidations in 2019. But the rate of closures fell by more than half over the course of last year - from 304 liquidations in the first three months of 2020 to 151 in the final quarter – reflecting the industry’s shifting fortunes throughout 2020.

With global hedge fund assets surging to a record total of USD3.6 trillion, the industry has maintained its momentum into 2021, with managers galvanised by the expanding opportunity set across the strategy spectrum.

New roll-outs in recent weeks have included LIOR Global Partners – a new ESG-focused discretionary macro hedge fund led by ex-H2O Asset Management PM Jeremy Touboul and Raphaël Remond, former CEO of State Street France – while Lombard Odier Investment Managers hired ex-Sandell Asset Management portfolio manager Raj Davé to run a new event driven special situations fund within its 1798 Alternatives unit.

“Having navigated extreme dislocations and volatility in 2020, hedge funds are maintaining an intense focus on ongoing new strains of coronavirus as well as vaccination progress, while at the same time focusing on evolved risks for 2021 including interest rate sensitivity, increasing inflation expectations, and geopolitical tensions across North America, Europe and Asia,” said HFR president Kenneth Heinz.

He also pointed to increased idiosyncratic equity volatility in recent months, fueled by retail trading spikes during the GameStop saga, and renewed interest in out-of-favour, deep value names and stocks with high short interest.

“Managers positioned for these powerful trends are likely to lead industry performance and growth in 2021,” Heinz said.

HFR’s main Fund Weighted Composite Index – a global, equal-weighted benchmark tracking some 1400 single-manager hedge fund strategies - has soared 16.6 per cent in the four-month period to the end of February 2021., the strongest four-month period in over 20 years. Equity-based strategies led the way, gaining almost 22 per cent over the same period.