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Hedge Fund Launches Back on the Rise
Managers are raising new funds again as improved fee arrangements bring investors back into the fold.
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 year.
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 percent.
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 9,733.