New hedge fund launches increased for the second consecutive quarter in Q2, with launches through mid-year 2019 on a pace that could see the industry top launches from calendar year 2018.
Launches totalled an estimated 153 in Q2 2019, bringing the H1 total to 289 new funds, according to the latest HFR Market Microstructure Report by HFR.
The H1 2019 launches put the industry on pace to top the 561 launches from last year, which represented the lowest annual total for new funds since 2000.
Fund liquidations declined but remained elevated on a calendar year basis, with liquidations falling to 186 funds, down from 213 in Q1 2019. H1 2019 liquidations totalled 399 funds, the highest annualised pace of liquidations since 1,016 funds closed in 2016. Q2 2019 also represents the fourth consecutive quarter in which liquidations exceeded launches, although the net decline of -33 funds in in the industry was smaller than the prior quarter.
The HFRI Fund Weighted Composite Index (FWC) advanced +7.4 per cent YTD through August 2019, led by the +9.8 per cent gain in the HFRI Macro (Total) Index. The HFRI FWC performance through August represents the highest return in the first eight months of a year since 2000, while the Macro Index performance is the highest over that time frame since 2003.
Hedge fund performance dispersion continued to narrow in Q2 2019, as the top decile of HFRI constituent performance (+10.1 per cent) declined sharply from the top decile in Q1 2019 (+21.1 per cent), while the bottom decile of constituents in Q2 (-6.2 per cent) was only slightly below the bottom decile in 1Q (-5.8 per cent). The top/bottom dispersion of 16.5 per cent in Q2 2019 represents a dispersion decline of over 1000 basis points over the Q1 dispersion of 26.9 per cent. The 12-month rolling decile dispersion also narrowed over calendar year 2018, with both top and bottom deciles improving: the top HFRI decile gained +21.9 in the trailing 12 months ending Q2, while the bottom decile fell -17.4 per cent over the same period, implying a dispersion of 39.3 per cent and representing a decline of nearly 350 basis points from the FY 2018 performance dispersion of 43.4 per cent.
Average hedge fund management fees industry-wide remained at the lowest level since HFR began publishing these estimates in 2008, while the average incentive fee fell slightly from the prior quarter. The average management fee fell by 1 basis point to an estimated 1.40 per cent, while the average incentive fee fell narrowly by 10 bps to 16.5 per cent.
The estimated average management fee for funds launched in Q2 2019 was 1.25 per cent, a slight increase of +6 bps from the 1Q launch average of 1.19 per cent. The average incentive fee for funds launched in Q2 2019 was 15.65, a decline of 225 bps from the 2018 launch average incentive fee of 17.90 per cent.
“Early 2019 risk-on trends moderated through mid-year on increased political and economic uncertainty, including Brexit, uncertain trade negotiations, competitive currency devaluations and persistently negative interest rates. As this uncertainly has increased, hedge fund launches have also increased as investors position for additional shifting in macroeconomic and geopolitical financial market environment,” says Kenneth J Heinz (pictured), President of HFR. “Global fixed income markets maintaining a supply of USD16 trillion on negatively yielding bond represents a temporary market disequilibrium and both an opportunity, as well as a risk for hedge funds managers, particularly interest rate-sensitive Macro hedge fund managers.
“As previously noted, the W-shaped financial market environment continues to dominate financial markets, with strong intermediate term trends contributing to strong performance of quantitative trend-following strategies in recent months,” adds Heinz. “Institutional investors are likely to exhibit increased sensitivity to duration associated with elevated risks resulting from ultra-low or negative interest rates, positioning in both tactical and effectively rate-hedged funds for a sharp adjustment or dislocation which may occur in coming months.”