New hedge fund liquidations fell to a record low in Q3 as total industry capital surpassed the historic USD4 trillion milestone to begin Q4 2021, according to the latest HFR Market Microstructure Report by HFR.
New hedge fund liquidations fell to a record low in Q3 as total industry capital surpassed the historic USD4 trillion milestone to begin Q4 2021, according to the latest HFR Market Microstructure Report by HFR.
Hedge fund liquidations fell to only 102, the lowest total since Q2 2006, as investors maintained or increased positions in existing hedge funds, driven by the uncertain macroeconomic environment including rising inflation, increased government spending, tapering of Federal Reserve bond purchases and the impact of Omicron coronavirus variant.
New hedge fund launches also declined to an estimated 132 in Q3 2021, though exceeded the estimated number of liquidations for the fifth consecutive quarter, which followed eight consecutive quarters of contraction. Launches in the trailing four quarters totaled 676 new funds, a total which tops calendar year totals for the past three years dating back to 2017 when 735 funds launched.
Strong HFRI performance and new fund launch trends are expected to accelerate into 2022, with total industry capital eclipsing a historic milestone to begin Q4 2021. As previously reported by HFR, total hedge fund industry capital increased to a record USD4.04 trillion in October 2021.
Led by Event-Driven strategies, which often focus on out-of-favour, deep value equity exposures and speculation on M&A situations, the investable HFRI 500 Fund Weighted Composite Index has gained +8.72 per cent YTD through November 2021, while the HFRI Fund Weighted Composite Index (FWC) has advanced +8.83 per cent. The HFRI 500 Event-Driven Index leads strategy performance YTD with a +13.1 percent return through November. Event-Driven sub-strategy performance has been driven by the HFRI 500 ED: Distressed Index, which has surged +21.4 per cent in 2021, while the HFRI 500 ED: Activist Index has gained +14.7 per cent.
The performance dispersion of the HFRI FWC in the trailing 12-month period ending 3Q21 narrowed from the record level period ending 1Q21, with the average of both the top and bottom deciles falling. For the quarter, the top decile of index constituents returned an average of +10.2 per cent, while the bottom decile fell an average of -11.3 per cent, creating a quarterly decile dispersion of +21.5 per cent. In the trailing four quarters, the top HFRI decile surged +75.8 percent while the bottom decile declined -9.1 per cent, creating a decile dispersion +84.9 per cent.
Average hedge fund fees industry-wide were unchanged from the prior quarter with management fees steady at 1.36 per cent, while the average incentive fees were also steady at 16.17 percent. Both estimated fees represent the lowest level since HFR began publishing these estimates.
For new funds launched in 3Q21, the estimated average management fee declined to 1.16 percent, which is slightly below the 2020 average for new launches of 1.24 percent. The average incentive fee for funds launched in 3Q21 was an estimated 16.45 per cent, below the 2Q21 average incentive fee of 17.0 per cent.
“Rising macroeconomic uncertainty continues to dominate hedge fund industry trends, driving institutional investors positioning for this uncertainty and looking for portfolio capital protections to maintain or increase allocations to existing managers, resulting in a historic low in fund liquidations. The forward uncertainty is driven by concerns regarding rising inflation, government spending, higher US interest rates and continued spread of the Omicron variant,” says Kenneth J Heinz, President of HFR. “These uncertainties continue to drive financial market volatility into year-end, with powerful risk-off sentiment dominating through mid-December after industry capital reached historic levels to begin Q4.
“Leading global institutions continue to expand allocations to funds which offer specialised, enhanced exposure to these trends as well as evolving cryptocurrency markets, balancing defensive capital protection with dynamic, opportunistic exposures. With industry capital having eclipsed a historic milestone, managers positioned for these powerful trends are likely to continue to attract institutional investor interest into 2022.”
