The number of new hedge fund launches declined, while the number of liquidations rose in the volatile Q3 2011, as Macro considerations surrounding the European sovereign debt crisis continued to drive financial markets and the resolution of the crisis remained unclear. According to the Market Microstructure Industry Report released today by HFR (Hedge Fund Research, Inc), new hedge fund launches declined to 265 funds in 3Q11, a decline of 15 over the prior quarter but representing a modest increase over 3Q10.
Hedge fund liquidations rose to 213 funds, an increase of 22 over the prior quarter and 45 over 3Q10. The 3Q11 liquidation total represents the highest quarterly total since 1Q10, when 240 funds liquidated, while hedge fund launches remain on pace for their highest calendar year total since nearly 1,200 funds launched in 2007.
Indicative of continued investor interest in Macro strategies, launches of new Macro funds have accelerated recently, representing nearly 35 per cent of all single manager launches in both the 2nd and 3rd quarters. Through the financial market turmoil which characterised 3Q11, the HFRI Macro Index posted a uncorrelated gain of 0.15 per cent in the quarter, while the HFRI Fund Weighted Composite Index declined by 6.65 per cent, the fourth worst quarterly decline since 1990. The number of Macro launches nearly equaled Equity Hedge fund launches (39.6 per cent) despite Macro funds representing only 21.6 per cent of all hedge funds, while Equity Hedge represents nearly half of all hedge funds.
Concurrent with increased volatility across all financial markets, the dispersion between the best and worst performing hedge funds expanded in 3Q11 from the low volatility levels experienced during of the first half of the year. The top performance decile of all hedge funds returned an average of 11.5 per cent in 3Q while the bottom decile declined by 27.5 per cent, producing a top-bottom decile dispersion of nearly 39 percentage points, doubling the 19 per cent dispersion of 2Q11. Dispersion in the trailing 12 months ending 3Q increased to 52 per cent from the 40 per cent dispersion in the trailing 12 months ending 2Q.
Hedge funds launched in the last year are offering investors lower management and incentive fees. Average management fees for funds launched during the previous 12 months declined to 1.58 per cent, a drop of 3 bps over the average management fee of funds launched in 2010. Similarly, average incentive fees of hedge funds launched during the same 12-month period declined to 17.04 per cent, more than 100 bps lower than the average of funds launched in 2010. In response to both regulatory and institutional transition, hedge funds also continued to evaluate alternative service providers, including changes to prime broker, legal, accounting and administrator partners, with increased trend toward both multi and specialised service providers.
“Trends in launches and liquidations in 3Q11 clearly reflect both increased investor risk aversion and strategic preferences for 2012, with an emphasis on Macro and Relative Value Arbitrage strategies which offer exposure to the macroeconomic and convergence trends continuing to dominate financial markets,” says Kenneth J Heinz (pictured), President of HFR. “Elevated levels of equity market volatility since mid-2010 have been a consistent theme and area of concern for global investors. Investors are allocating to hedge funds which provide not only the tactical portfolio complement, but institutional risk management systems, infrastructure and transparency, which will continue to appeal to investors into the coming year.”