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Hedge fund liquidations fall as investor inflows drive capital to record levels

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Hedge fund liquidations declined in Q2 2017 as new investor inflows increased total hedge fund industry capital to a record USD3.1 trillion through mid-year, according to the latest HFR Market Microstructure Report.

The number of liquidations fell to 222 in Q2 2017, representing a decline from the prior quarter total of 259, as well as a narrow year-over-year decline from the 239 liquidations in Q2 2016.
 
Meanwhile, hedge fund launches were steady in Q2 2017, with 180 new funds opening as inflows resumed and total industry capital reached a record. The number of Q2 2017 launches was slightly below the 189 launches in Q1 2017 and the 170 launches in Q2 2016.
 
The HFRI Fund Weighted Composite Index has gained 5.4 YTD though August, with monthly performance gains in nine consecutive months.
 
Average hedge fund management and incentive fees declined narrowly from Q1 2017 as the average management fee fell by 1 basis point (bp) to 1.46 per cent in Q2, and the average incentive fee fell 10 bps to 17.2 per cent. The average management fee for funds launched in Q2 2017 fell to 1.28 per cent, as compared to 1.4 per cent for Q1 2017 launches, while the average incentive fee for funds launched in Q2 2017 declined to 16.9 per cent, down 21 bps from the prior quarter. HFR estimates that only approximately 30 per cent of all hedge funds currently charge management and incentive fees equal to or greater than two-and-20.
 
HFRI performance dispersion declined in Q2, as the top decile of hedge funds gained an average of +10.1 per cent, while the bottom decile declined 8.3 per cent (a dispersion of 18.4 per cent), representing a modest decline from +14.12 and -7.0 per cent, respectively, in Q1 2017 (21.1 per cent dispersion). Over the trailing 12 month period ending Q2, the top decile of funds averaged a +34.3 per cent return, while the bottom decile fell an average of -15.4 per cent, a one-year performance dispersion of 49.7 per cent.
 
“Hedge fund liquidations declined as total industry capital eclipsed another record with new investor inflows, while the HFRI extended steady performance gains through mid-2017,” says Kenneth J Heinz (pictured), President of HFR. “We expect a continuation of the favourable trend in new launches, as well as expansion of the alternative investor base interest to also encompass Risk Parity & Risk Premia strategies. With equity markets continuing the pattern toward increasing record levels, investors continue to exhibit and demonstrate enthusiasm for hedge funds and alternative beta strategies as integral portfolio components.”  

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