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Hedge fund liquidations fall to pre-crisis levels

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The number of new hedge fund launches increased in the fourth quarter of 2009 even as the pace of liquidations continued to decline, according to data from Hedge Fund Research.

During Q4 2009, an estimated 230 funds launched while 165 liquidated, continuing the momentum from Q3 09 when launches outpaced liquidations for the first time since the start of the financial crisis.

For the FY 2009, liquidations outpaced launches with over 1,000 funds liquidating and nearly 800 new funds launching. 2009 was the second consecutive calendar year in which liquidations exceeded launches; in 2008 a record 1,471 funds liquidated while only 659 launched.

Average incentive fees have declined since the start of the financial crisis, with the decline being more pronounced in funds of hedge funds. Incentive fees for single manager funds fell to 19.2 per cent (versus 19.34 per cent in Q1 08) while funds of hedge funds fell to 6.9 per cent (versus 8.05 per cent in Q1 08). The average incentive fee for funds launched in 2009 was 17.6 per cent, 1.6 per cent below the broader industry average.

Post-financial crisis, hedge funds are characteristically employing low levels of leverage, with approximately 40 per cent of single manager funds employing no leverage, while approximately 52 per cent use leverage between one and two times their investment capital. For futures trading funds, more than three quarters of funds employ less than 20 per cent margin to equity ratios.

According to the research, as a function of the volatility and recovery of the last two years, both 2008 and 2009 saw increased dispersion between the best and the worst performing funds. The top performing decile (ten per cent) of hedge funds returned an average of 100 per cent in 2009, while the bottom decile lost an average of 16.5 per cent.

This contrasts with 2008, when the top decile gained 40.9 per cent, while the bottom decile lost 62.4 per cent. Eighty per cent of funds posted positive performance in 2009, while approximately 30 per cent were positive in 2008.

In response to institutional investor demand, many hedge funds have also recently launched Ucits III compliant fund vehicles, which adhere to specific risk parameters and allow products approved by a single EU regulator to be distributed throughout the region. HFR estimates that there are now more than 250 Ucits III compliant fund vehicles available, and has included these funds in its HFR Database product.

“The financial crisis and subsequent recovery have impacted and reshaped nearly every aspect of finance, and the process of recovery in still ongoing in the hedge fund industry,” says Ken Heinz, president of Hedge Fund Research. “A number of firms were able to achieve outstanding results in 2009 amidst a very complex economic environment, but the landscape in terms of capital, strategies, service providers, fees, regulation, liquidity and transparency, has evolved significantly. These trends are likely to define the growth of the hedge fund industry in the next decade.”

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