Hedge funds are making their comeback.
Last quarter saw the number of new funds rise for the first
time since the beginning of 2016, increasing to 189 from 153 in
the fourth quarter, according to a statement Friday from HFR.
This is a reversal from the past year when fund launches
steadily declined and liquidations mounted as a result of
investor dissatisfaction with the industry. Although closures
still outnumbered newly created funds in the first quarter, the
pace of liquidations slowed to 259, from 275 in the last three
months of 2016.
Investors are beginning to allocate to hedge funds again
as both performance and fee arrangements have improved. Their
rising tolerance for risk and declining expectations for
short-term market volatility have also bolstered the hedge fund
industry, according to HFR.
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, Kenneth Heinz, president of HFR, said in
the statement. It is likely these trends will remain
central to industry growth for the balance of the
Funds started in the first quarter charged an average
management fee of 1.4 percent up slightly from the 1.3
percent for funds launched in 2016, but still low compared to
previous levels. Performance fees, meanwhile, dropped 30 basis
points to 17.1 percent on average.
HFR estimated that just 30 percent of all hedge funds still
charge fees greater than or equal to the traditional 2-and-20
model, where investors are charged 2 percent management fees
and 20 percent for investment performance.
The industry, which has expanded to a record
$3.07 trillion of assets, saw the top ten percent of hedge
funds gain 36.5 percent on average over the twelve months
through March, according to HFR. The bottom decile lost 13.8
Even with signs of a comeback, the number of newly created
hedge funds remains below levels seen in recent years. For
example, there were 264 new funds and 217 closures in the first quarter of 2015. And with
liquidations still outpacing launches, active hedge funds,
including hedge fund of funds, declined last quarter to