The number of hedge fund launches in Q3 hit a three-year low while liquidations rose to the highest level since the final quarter of 2012, as US regulators pushed ahead to approve the Volcker Rule.

The number of global hedge fund launches in this year’s third quarter hit a three-year low while liquidations reached the highest level since the final quarter of 2012, as US regulators pushed ahead to approve the long-delayed Volcker Rule, according the latest HFR Market Microstructure Industry report.

“Hedge fund launches declined in the third quarter, as both managers, investors and financial institutions awaited the finalization and regulatory approval of the Volcker Rule, which includes provisions restricting proprietary trading by financial institutions, as well as restricting ownership of hedge fund firms by financial institutions,” said Kenneth Heinz, president of HFR.

“While the increased uncertainty has likely adversely impacted hedge fund launches in the short-term, over the intermediate to long term, the adoption of the rule is likely to result in increased hedge fund launches, as experienced investment professionals set up new funds utilizing their trading acumen,” Heinz said.

In fact, hedge funds are likely to expand in scope to assume an increasingly mainstream role in global capital markets, he added.  

The Volcker Rule, passed last week after a delay of three years, is named after former Federal Reserve chairman Paul Volcker and aims to limit excessive risk by preventing certain banking entities from betting on financial markets for their own account. As well as prohibiting banking entities from engaging in various short-term proprietary trades for their own gain, the final rules also impose limits on their investments in, and other relationships with, hedge funds or private equity funds (view more here). Some media reports have also noted that the Volcker guidelines may make it harder for some banks to provide certain private fund services to their high net worth clients.

According to HFR, hedge fund launch trends have not - unlike what seems to be the case with the Volcker Rule - been significantly impacted by the recent relaxation of hedge fund marketing restrictions associated with the JOBS Act (see related findings here).

Numbers and performance

According to HFR's latest figures, fund launches totaled 231 for the third quarter of 2013, down from 288 in the prior quarter and 275 a year ago. This represents the lowest quarterly launch total since the final quarter of 2010 which saw 220 funds launches, the research firm said.

Meanwhile, hedge fund liquidations rose to 222 in the third quarter of 2013, up from the 190 logged in previous quarter and the 211 recorded a year ago. This is the highest quarterly total since 238 funds liquidated in Q4 2012, the firm noted.

Continuing the trend of prior quarters, average hedge fund management and incentive fees declined across the industry, with average management fees falling 1 basis point to 1.53 per cent. Incentive fees declined 11 bps to 18.2 per cent.

The funds launched in 2013 had an average management fee of 1.38 per cent, a decline of 24 bps from 2012 launches, while incentive fees for 2013 launches averaged 17.17 per cent - 57 bps lower than management fees charged by 2012 launches.

The performance dispersion between the best- and worst-performing funds also narrowed slightly in the third quarter, as the top decile of HFRI constituents gained, on average, +13.26 per cent while the bottom decile fell -8.26 per cent. This, HFR said, created a decile dispersion of 21.5 per cent, declining from the 22.8 per cent of the prior quarter.

By contrast, in the trailing 12 months, the top decile of HFRI constituents gained +38 per cent on average, while the bottom decile declined -19.2 per cent. This led to a higher performance dispersion of 57.2 per cent. It also exceeded the 50.2 per cent and 48.6 per cent dispersion in each of the two previous years.