Hedge Fund Launches Rise as AUM Hits Record Level

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According to data released by Hedge Fund Research (HFR), the number of new hedge fund launches totaled 189 in the first quarter of 2017, up from 153 in the prior quarter and marking the first increase in launches since the first quarter of 2016.  At the end of the 1st Qtr, total assets invested in hedge funds rose to a record $3.07 trillion.

1st Qtr HFR Results

While the number of new launches rose during the 1st Qtr, hedge fund liquidations dipped slightly to 259 during the quarter, down from 275 in the prior quarter.  In fact, during the twelve months ending March 2017 1,025 funds were shuttered while 712 new funds were launched.  This led the total number of active hedge funds, including fund of hedge funds, to fall to 9,733 funds.

HFR analysts ascribe the increase in hedge fund launches and slowdown in liquidations to a number of factors, including a reduction in the fees charged by managers.  HFR reports that the average hedge fund management and incentive fees declined this past quarter, as the average management fee fell by 1 basis point to 1.47% in 1Q 2017, and the average incentive fee fell 10 bps to 17.3%.  Currently, approximately 30% of all hedge funds charge management and incentive fees equal to or more than 2% and 20%.

Kenneth Heinz, President of HFR commented on this data, “The recent increase in launches and moderation in liquidations is consistent with the trend of fee structures evolving to meet institutional investor demands and requirements. It is likely these trends will remain central to industry growth for the balance of the year.”

HFR also reported that performance dispersion fell slightly in 1st Qtr, as the top decile of hedge funds gained an average of +14.1%, while the bottom decile dropped -7.0% — a dispersion of 21.1%. This represents a modest narrowing from the +13.7% and -10.1% performance seen by the upper and lower deciles in the 4th Qtr of 2016, representing a slightly lower dispersion of 23.8%.

Our Take

Despite the fact that the total number of funds is continuing to drop, the slowdown in liquidations, the pickup in fund launches, and the growing asset base are all constructive signs for the hedge fund industry.  In addition, the reduction in hedge fund fees is also a positive development for the industry as managers look to incentivize investors to remain in alternative investments.

These trends should also be good news for players in the investment research and data businesses as hedge funds have traditionally been strong consumers of value added insights.  As the overall number of hedge funds starts to rise again, we would not be surprised to see demand for alternative research and data services also rise sharply.  Such a development could be a nice counter to the headwinds that MiFID II is projected to have on research spending.

 

 

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About Author

Mike Mayhew is one of the leading experts on the investment research industry. In addition to founding Integrity Research, Mike is on the board of directors of Investorside Research Association, the non-profit trade association for the independent research industry, and a frequent speaker on research industry trends and developments. Mike has over thirty years of research industry experience. Email: Michael.Mayhew@integrity-research.com

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