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Hedge fund launches rise as HFRI tops US equities

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New hedge fund launches rose to the highest level in three quarters in Q1 2015, as strong performance industry-wide drove both total global hedge fund capital and the total number of hedge funds to record levels. 

Hedge fund launches totalled 264 in Q1 2015, the highest level since 2Q 2014, bringing the total number of hedge funds globally to 10,149 according to the latest HFR Market Microstructure Industry Report. Total hedge fund capital increased to a record of USD2.94 trillion in Q1 2015, while the HFRI Fund Weighted Composite Index and HFRI Equity Hedge Index posted gains of +3.9 and +5.0 per cent YTD through May, respectively, topping the performance of both the S&P 500 and DJIA over that time period.

Launches were led by the Equity Hedge strategy with 142 new funds, representing 54 per cent of all new funds launched. Industry-wide, Equity Hedge represents 37.7 per cent of all hedge funds, making it the largest single strategy area by number of funds, with these managing over USD820 billion of investor capital. Hedge fund liquidations also rose, reaching 217 in the quarter, the highest level since Q1 2014, though only a small increase over the prior quarter total of 203.

Performance dispersion between the top and bottom deciles of the HFRI increased in Q1, with the top performing decile of the HFRI gaining an average of +12.0 per cent, while the bottom decile posted a decline of -7.6 per cent. In the trailing 12 months ended Q1 2015, the top performing decile of the HFRI was up +35.5 per cent while the bottom decile fell by -20.7 per cent, resulting in a decile dispersion of 56.2 per cent. This represents an increase over FY 2014 dispersion of 46.9 per cent, when the top decile gained +27.4 per cent while the bottom decile -19.5 per cent.

Average management fees industry wide in Q1 2015 increased by three basis points over the prior quarter to 1.54, while average incentive fees declined by 12 basis points to 17.73 per cent. The average management fee for funds launched in Q1 2015 was 1.52 per cent, representing a decline of 5 basis points over the management fees of 2014 launches. Average management fees for Q1 2015 launches fell to 17.04 per cent, representing a decline of 31 basis points from the 17.35 per cent average incentive fee of 2014 launches.

“Hedge fund launches accelerated in early 2015 as total hedge fund capital eclipsed a record level and investor risk tolerance continued to normalise, with launches concentrated in Equity Hedge as institutional investors look to diversify their direct equity market beta into more sophisticated alternative beta,” says Kenneth J Heinz, President of HFR. “The environment to launch new funds continued to be challenging, with mangers balancing increased demands for performance, transparency, liquidity and complex regulation. While allocating to newly launched emerging managers requires investors to bear incremental, firm-specific risk, investors are compensated for these idiosyncratic risks through innovative strategies, access to capacity and dynamic, early stage fund performance.”

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