Hedge funds appear to barely break even for clients this year and, unsurprisingly, the old "two and twenty" fee model is a thing of the past.

The hedge fund industry is heading for a year in the red. It is down since the start of January, but there is some consolation, the sector has not been as beaten up as stock markets in general. Overall, though, this has been a tough year, with funds' fees at their lowest on record.

According to Preqin, a firm tracking alternative investment areas such as hedge funds, private equity and real estate, hedge fund returns are negative at -0.76 per cent in November, which means that they are down by -1.65 per cent since the start of this year. (This is according to the Preqin All-Strategies Hedge Fund benchmark). 

Weaker equity markets, such as emerging markets, as well as some unexpected spikes in volatility (as seen at the start of this year), have taken their toll. 

Hedge funds are sometimes pitched to investors because they can protect capital when markets take a bath. A negative year-to-date result for the sector is going to disappoint those seeking that protection. Even so, the MSCI World Index of developed countries’ equites, measured in dollars, has sunk by 8.33 per cent. 

A separate report recently issued by Chicago-based Hedge Fund Research, shows that average hedge fund management fees remained at their lowest level since HFR began publishing these estimates in 2008, while average incentive fees fell from the prior quarter. Average management fees industry-wide remained unchanged at an estimated 1.43 per cent, while the average incentive fee narrowly fell by -5 bps to 16.93 per cent.

Equity, event
Preqin’s report said that both equity and event-driven strategies hedge funds recovered slightly from their negative start in the fourth quarter, up by 0.07 per cent and 0.04 per cent respectively. Similarly, activist vehicles performed notably better (+0.65 per cent) than in October, although they remain in negative territory for 2018 YTD (-0.92 per cent).

Funds of CTAs [commodity trading advisors] struggled, falling by 2.02 per cent in November, with the Preqin All-Strategies Fund of CTAs benchmark firmly on track to produce its lowest year-end cumulative return in over 10 years. (According to one definition, a CTA acts as an asset manager. It follows a set of investment strategies using futures contracts and options on futures contracts on a wide variety of physical goods such as agricultural products, forest products, metals, and energy, plus derivative contracts for financial instruments such as indices, bonds, and currencies.)

Hedge funds focused on Asia-Pacific outperformed all other regions tracked by Preqin during November (+1.72 per cent), marking the benchmark’s highest return since January 2018, Preqin said.

Shutdowns
With funds on average being under water this year, it is unsurprising that hedge fund liquidations exceeded launches in the third quarter of this year, reversing a four-quarter trend of net growth in the number of funds. According to the latest HFR Market Microstructure Report, released by HFR for 2018 through to the third quarter, the number of new hedge fund launches narrowly exceeded liquidations by a margin of 450 to 444.

Fund liquidations rose in the third quarter with 174 funds liquidating compared with 137 in the same period last year. Liquidations in Q3 also exceeded the Q2 total of 125.