Although final results for the full year haven't yet been collected, third-quarter figures suggest that the hedge fund industry is on track to enjoy one of its most successful years for some time.

New hedge fund launches increased to the highest level in five quarters in the third quarter of 2020 due to the rising optimism about the US economy’s prospects, and the sector’s returns having beaten those of US equities, industry figures show.

Launches rose to an estimated 151, according to Hedge Fund Research, a research firm based in the US. That figure is the highest quarterly launch total since the second quarter of 2019 and it beat the estimated quarterly liquidations for the first time since Q2, 2018. 

In Q2 of 2020, 129 funds were launched.

Fund liquidations fell to an estimated 137 in Q3, 2020, the lowest liquidation total since the second quarter of 2020 and sliding by more than half from the 304 liquidations in in the first three months of 2020 – when the pandemic broke out.

HFR reckons that an estimated 619 funds were folded in 2020, with nearly half of those occurring in the first three months of 2020 alone.

Such data points to how the hedge fund sector, which at times has struggled over the past decade, has managed to hold its own in some strategies over the past year.

The investable HFRI 500 Fund Weighted Composite Index® which HFR issues rose by 5.1 per cent in November, increasing its year-to-date return to 6.1 per cent and topping the 3.9 per cent year-to-date gain of the Dow Jones Industrial Average benchmark of US equities.

The HFRI 500 Equity Hedge Index led strategy performance in November with a 7.5 per cent return, bringing year-to-date performance to 10.9 per cent – handily beating conventional equities.

Average hedge fund management fees remained flat from the prior quarter at an estimated 1.37 per cent, while the average industry-wide incentive fee dropped by 1 basis point to end Q3 at 16.36 per cent. Both figures represent the lowest level for both fees since HFR began publishing these estimates, HFR said. 

“After posting strong gains through the tumultuous 2020, investors are actively increasing exposure to hedge funds, including cryptocurrency strategies, and are positioning for growth in capital and new launches in 2021,” Kenneth J Heinz, president of HFR, said.

“Macroeconomic and geopolitical risks have shifted heading into 2021, with near-term focus on the resolution of US congressional elections, the incoming presidential administration, the economic impacts of UK/European trade relations, and the efficacy of vaccination programmes globally,” he continued. “Hedge funds have successfully navigated extreme dislocations throughout 2020 and, as a result of this, are likely to continue attracting institutional investors as a portfolio mechanism to reduce overall volatility and direct equity and interest rate beta, while opportunistically positioning for elevated levels of volatility across asset classes into 2021.”