HFR: Hedge Fund Launches, Liquidations Decline in Q2/16

Sep 15 2016 | 11:14pm ET

Hedge fund launches and liquidations both declined in the second quarter, as the alterative asset class posted fairly steady gains through a relatively volatile period marked significantly by Britain’s Brexit vote, according to the latest edition of Hedge Fund Research’s HFR Market Microstructure Report.

New hedge fund launches totaled 200 in 2Q 2016, down slightly from 206 in the prior quarter, and 252 in 2Q15, HFR said. Liquidations, meanwhile, totaled 239 in the quarter, compared to 291 in Q1 and 200 liquidations in the second quarter of last year.

While liquidations exceeded launches for the third consecutive quarter, HFR noted that Q2 showed the thinnest margin of between the two, 39 funds, of the three. In the first half of 2016, the data is more lopsided; 530 fund liquidations versus 406 launches. Accordingly, liquidations are on an annual pace to hit the second-largest total since HFR began tracking this data in 1996, while launches would represent the lowest new launch total since 2009.

Assets, meanwhile, remain slightly below last year’s record levels. Total hedge fund industry capital as of June 30 was $2.898 trillion, approximately 2.4% below Q2/15’s $2.969 trillion.

While average industry-wide fees remained flat from the first quarter, new fund launches reflect a trend towards declining fees, HFR observed. Overall, average hedge fund management and incentive fees remained at 1.50% and 17.6% in Q2. However, for funds launched in the quarter, management fees dipped to 1.45%. 

Reflecting the volatility present during the period, performance dispersion declined during the quarter as returns for both the top and bottom deciles rose. The top decile of HFR’s HFRI universe gained an average of +13.7 percent in the quarter, while the bottom decile lost -7.6 percent, expanding from averages of +12.1 and -13.2 percent, respectively, in 1Q16.  Over the last four quarters, dispersion has declined slightly compared to calendar year 2015, HFR said.

Hedge funds with AUM under $1 billion outperformed their larger brethren during the quarter, and are ahead for the year to date, HFR added. Funds with AUM below $1B gained +1.85% in 2Q and are up +3.6 percent YTD through August, while funds with AUM greater than $1B gained +1.55% in 2Q and +2.1 percent YTD.

“The current ultra-low interest rate environment continues to be challenging for new fund launches, with intense competition to differentiate strategies, while fees remain a critical focus for investors,” stated Kenneth Heinz, president of HFR. “In this environment, hedge funds, regardless of size or maturity, which are able to differentiate their strategies with compelling performance and competitive terms, are likely to attract new investors capital and lead industry growth in 2H16.”  

Established in 1992, HFR is a global leader in specializing in the indexation and analysis of hedge funds. The company produces the HFRI, HFRX and HFRU Indices, industry benchmarks for global hedge fund performance, and calculates over 100 indices ranging from industry-aggregate levels down to specific, niche areas of sub-strategy and regional investment focus.

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