Hedge fund launches in 2011 increased to the highest level since 2007, as investors and managers positioned for 2012 amid intense volatility and macroeconomic uncertainty, according to HFR (Hedge Fund Research Inc).
Hedge fund launches totalled 1,113 in 2011, including 270 in 4Q11, the highest calendar year total since 1,197 funds launched in 2007. Fund liquidations declined from the previous quarter but rose for the full year, with 190 liquidations in 4Q11 and 775 for the year; the 2011 total represents a narrow increase over the 743 liquidations in 2010. The total number of funds rose to 9,523 in 2011, while total hedge fund industry capital rose by 3 per cent to USD2.02 trillion.
New fund launches in 2011 were concentrated in Equity Hedge and Macro strategies, with 479 and 265 fund launches, respectively; the former is the highest EH launch total since 2006, while the latter is the highest total for Macro since HFR began tracking this in 1996. Equity Hedge also experienced a high rate of liquidations, with 293 EH funds closing, the highest since 651 funds closed in 2008. Attrition in Fund of Hedge Funds declined to a pre-Financial Crisis level; FOF experienced 215 closings in 2011, the fewest liquidations since 2007. By management firm location, slightly more funds were launched in the US than Europe, while liquidations were higher in Europe, with both representing reversals from the prior year.
While the HFRI Fund Weighted Composite Index declined by 5.26 per cent in 2011, constituent fund dispersion also narrowed in 2011to the lowest level since 2006, with the compression concentrated in fewer positive outliers. The worst performing decile of the broad based composite declined by 30.7 per cent for 2011, while the top decile gained 19.5 per cent, implying a top-bottom dispersion of just over 50 per cent. This represents a decline from nearly 58 per cent in 2010 and over 100 per cent in both 2008 and 2009. Last year marked the lowest average performance for the top decile since HFR began tracking this metric in 2000 by a significant margin; the next lowest performance by the top HFRI decile was a gain of 39.2 in 2002, nearly twice the 2011 figure.
Average management fees were unchanged from the prior quarter at 1.57 per cent; these declined 1 basis point for the year. Average incentive fees continued to decline, with these falling to 18.71 per cent; incentive fees declined 1 basis point over 3Q11 and 24 bps since year end 2010.
“Despite performance volatility and macroeconomic uncertainty in the second half of the year, investors maintained a strong commitment to hedge funds, and fund managers expanded the scope and breadth of strategies offered, making 2011 the strongest year for new launches since the global financial crisis,” says Kenneth J Heinz (pictured), President of HFR. “While some have suggested that increased regulation may deter new fund launches, many hedge funds are launching not only as a result of increasing investor risk tolerance, but also as a result of these regulatory changes to trading activities and risk oversight at financial institutions. The hedge fund industry has and will continue to expand and innovate to offer more sophisticated and transparent strategies to meet the requirements of institutional investors.”