A mixed set of results: the desire to launch new hedge funds fell this year and investors have taken some bets off the table. But they made solid returns so far in 2019, with the highest result since 2010.

The world’s hedge fund sector is on course to chalk up the lowest annual total for new fund launches for 19 years, down at the levels seen after the dotcom bubble burst in 2000, according to industry numbers. 

It appears that investors avoided new strategies amid US-China trade rows, Brexit and market wobbles in the latter stages of 2019. On a brighter note, however, hedge fund investment performance was slated to be the highest for nine years.

The figures came from Chicago-based Hedge Fund Research, which tracks performance, fundraising and other metrics in the sector. 

Launches totaled an estimated 102 the in third quarter of this year, bringing the year-to-date total to 391 new funds, according to the latest HFR Market Microstructure Report. The YTD launch total puts the industry on pace to fall below 500 new launches for 2019, which would represent the lowest annual total for new funds since 328 funds were launched in 2000, HFR said. 

As far as performance is concerned, the HFRI Fund Weighted Composite Index® (FWC) gained 8.5 per cent for the year so far through November 2019, led by the 11.2 per cent gain in the HFRI Equity Hedge (Total) Index. With these gains, the HFRI FWC performance is on pace for the highest calendar year performance since 2010.

Behavior
“Following the 3Q decline in risk tolerance, risk-on behavior has reasserted itself into 4Q as volatility associated with certain components of trade negotiations, Brexit and political uncertainty has subsided driving US equities to record highs,” Kenneth J Heinz, President of HFR, said.

“While it is likely for launches to resume the 1H19 trend in 4Q19 as a result of the increased investor risk tolerance, it is also likely for launches to rise and liquidation to continue to fall as institutional investors position for increasing geopolitical risks in 2020, with these led by the US election, Brexit, and inevitable interest rate increases from suppressed or, in many cases, still negative levels,” he continued. 

European-located funds led launches not only in 3Q, but extended a trend observed so far throughout 2019. In the quarter, 76 of the 102 launches were from European-located firms, while for the year, 285 of the 391 launches (73 per cent) were from European-located firms.

Overall fund liquidations declined sharply from the prior quarter, as 141 funds closed their doors in 3Q, compared with 186 liquidations in the prior quarter and 174 liquidations in 3Q18. For the year, 540 funds have liquidated, which is on pace to exceed last year’s liquidation total of 659, though it would also represent the second-lowest calendar year liquidation total since 2007. 

Hedge fund performance dispersion remained compressed but widened mostly in 3Q19, with the average performance of both the top and bottom deciles falling. 

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 1.39 per cent, while the average incentive fee fell narrowly by 10 bps to 16.4 per cent.