The hedge fund industry has faced a reckoning over the last few years, with investors pulling capital and many funds shutting down in response. Yet 2019 may not have been as bad for hedge fund managers as it first looked, according to data firm PivotalPath.
Hedge Fund Research estimated that some 540 hedge funds had shut down by the end of the third quarter last year, while 391 new funds had been launched. This compares with 659 fund closures and 561 launches in all of 2018, according to HFR.
These figures may not provide an accurate depiction of the institutional investing landscape, according to PivotalPath. When looking only at hedge funds that asset owners would actually consider allocating to — and excluding “smaller and less reputable” managers — PivotalPath tracked just 48 fund closures in 2019. In 2018, by comparison, PivotalPath recorded 101 fund liquidations.
“There has been an overall negative tone around the hedge fund industry in recent times — a seeming consensus that hedge fund closures and poor hedge fund performance have become commonplace,” PivotalPath stated in its report on the research. “From our vantage point… we have observed a different dynamic, one that is far more positive.”
The hedge fund data firm did notice a decline in hedge fund launches, similar to the trend reported by HFR and other industry trackers. According to Pivotal Path, there were just 46 relevant fund launches in 2019 — less than half of the 106 launches seen in 2018, and well below the five-year average.
[II Deep Dive: Hedge Fund Launches Hit 18-Year Low]
“Nonetheless, we believe 2019 was a healthy launch environment as both managers and allocators were encouraged by strong performance and overall positive market sentiment,” the report argued. “Additionally, the funds that launched were of higher quality as the bar for a new launch is much higher today than it was in the past.”
According to PivotalPath, fundamental equity and equity sector strategies were the most popular strategies targeted by hedge funds launched last year, followed by credit and global macro. However, these same strategies were also prevalent among hedge funds that closed last year.
Institutional-quality hedge funds that shuttered in 2019 also had an average track record of just over seven years, according to PivotalPath. The shortest track record recorded was five months, while the longest was 26.5 years. The numbers were fairly similar in 2018, when the average hedge fund shut down after 6.5 years.
“What resonates in the data for both years is that approximately 20 percent of hedge funds shut down within the first two years after launching and over 50 percent of hedge funds shut down within six years of launching,” the report stated. “Given 2019 had a smaller, more select set of high-quality launches, we might expect to see a decrease in the number of funds shutting down within the first few years.”