Hedge fund launches declined in the third quarter, as funds again posted steady gains following the Brexit vote and leading into the surprise US Presidential election results.
New launches totalled 170 in Q3 2016, down from 200 in the prior quarter and 269 in Q315, according to the latest HFR Market Microstructure Report.
The number of launches in Q3 2016 represents lowest since Q1 2009 and marks the fourth consecutive quarter of net contraction in the overall number of active funds. A total of 576 funds have launched in the first three quarters of 2016, a decline of over 200 from the 785 launches over the same period last year.
Hedge fund liquidations also increased in Q3 2016, rising to 252 from 239 in the prior quarter, though nearly identical to the number of funds closed in Q315, when 257 funds liquidated. Through the first three quarters of 2016, liquidations totalled 782, which is on pace for the highest number of liquidations since the financial crisis.
Total hedge fund industry capital increased to a record of USD2.979 trillion through Q3 2016, surpassing the previous record of USD2.969 trillion in 2Q15. The total number of hedge funds, including fund of hedge funds, declined to 9,925, falling below 10,000 funds for the first time since 2014.
Average industry-wide fees posted narrow declines from the prior quarter, although fee data was mixed on new fund launches. The overall average hedge fund management fee fell to 1.49 per cent as of Q3, a drop of 1 basis point (bps), while the average incentive fee declined 10 bps to 17.5 per cent. Average management fee for funds launched in 2016 was a similar 1.48 per cent, declining from 1.6 per cent for 2015 launches. The average incentive fee for the vintage of funds launched in 2016 increased to 18.8 per cent, up over 100 bps from 17.75 per cent for 2015 launches.
HFRI performance dispersion was steady for Q3 though returns for both the top and bottom deciles rose over the prior quarter. The top decile of HFRI performance gained an average of 14.77 per cent in the period, while the bottom decile declined 7.05 per cent, increasing from averages of +13.74 and -7.6 per cent, respectively, in Q2 2016. Over the last four quarters, the top HFRI decile gained 29.54 per cent, while the bottom decile fell an average of 15.57 per cent, a dispersion of 45.1 per cent, in line with FY 2015 dispersion.
Small and mid-sized hedge funds (AUM < USD1 billion) outperformed larger, established managers (AUM > USD1 billion) for Q3, but the performance differential narrowed YTD 2016. Funds with AUM below USD1 billion gained 3 per cent in Q3 and 4.7 per cent YTD, while funds with at least USD1 billion AUM advanced 2.5 per cent in Q3 and 3.8 per cent YTD.
The HFRI Fund Weighted Composite (FWC) Index gained 3.0 per cent in Q3 2016, contributing to a YTD return of +4.6 per cent through November, topping the MSCI World Index over the same period. The HFRI Asset Weighted Composite (AWC) Index recovered losses through mid-year by gaining 2.2 per cent in Q3 and is now up 1.9 per cent YTD through November.
“The total number of hedge funds has declined from its peak in Q3 2015, even as industry capital has risen to record levels, with a large component of the recent consolidation occurring within the fund of hedge funds (FOF) space. Over the last year, as total industry capital increased by +3.4 per cent, the number of single-manager hedge funds declined -2.5 per cent, while the number of FOF’s fell by 6.6 per cent,” says Kenneth J Heinz (pictured), president of HFR.
“As a result of the overall increase of industry capital during this period of fund consolidation, the size of the average hedge fund has continued to rise, suggesting that investors are becoming more comfortable and willing to allocate to innovative, emerging managers as a complement to more established holdings. Investor risk tolerance has increased significantly since the US election, this combined with continued macroeconomic uncertainty and favourable political policy evolution is likely to drive industry growth into early 2017.”