The year of the pandemic ate 20 percent more hedge funds than in 2019, but the funds that closed were well established in many cases, according to new research.
Hedge fund research and data firm PivotalPath found that 79 funds closed in 2020, compared to 66 the year before. Jon Caplis, chief executive officer of PivotalPath, said in an interview that confirmed closings represented on average bigger firms with longer track records compared to recent years.
“Many of these funds that have hit the 20- or 25-year mark are still essentially mom-and-pop organizations, even if they have a tremendous asset base,” said Caplis. “They’ve been run typically by the head investor rather than a CEO. A lot of these companies haven’t made it past their founders. I think some of them decided to throw in the towel this year.”
PivotalPath found that the average track record for funds that closed in 2020 ran for 8.75 years. In contrast, the average track record was a little more than seven years for funds that shut down in 2019. In 2020, the closed fund with the shortest track record was three months, with the median being 7.4 years.
The research firm reported that funds closed in 2020 had on average $650 million in assets, with the median being $250 million. In 2019, the average size of a closed funds was $580 million in assets. The median that year was $420 million.
“We saw the same thing after ’08. When markets became very volatile and difficult, these managers said, ‘I’ll create a family office.’ We’re seeing something like that again,” said Caplis.
While the pandemic led to a surge in fund closings tracked by PivotalPath, launches held fairly steady. Some managers likely pushed their launches to this year, amid the uncertainty, according to Caplis.
“With all the volatility going on, they probably asked themselves, ‘Do we want our first month to be down 10 percent just because the markets are insane right now?’” he said. Investors also likely drove some of those decisions, delaying commitments to build cash reserves, for example, according to Caplis.
Fund launches followed performance. Equity sectors funds were the top performing funds in 2020, gaining 24.7 percent. These funds also represented 47 percent of the year’s new offerings, PivotalPath’s research report shows. Equity diversified funds made up about 30 percent of last year’s launches, followed by credit funds, with about 15 percent.
[II Deep Dive: Pandemic Pushes Investors Toward Biggest Alts Managers]
Hedge fund managers are increasingly specialized, whether by geography or sector, according to Caplis. Funds are following the lead of investors, who are creating portfolio diversification themselves, rather than relying on managers to do that for them.
“Investors’ way of thinking has changed. So, you’re seeing fewer traditional long-short funds and seeing more sector strategies where managers can add more value and have more stock selection opportunities,” said Caplis. “Even with credit strategies, other than private credit, people have gotten away from putting money with a manager and having them figure out the best opportunities, such as in distressed. You’re seeing it everywhere.”
PivotalPath reported that about half of the funds opened last year had less than $100 million in assets. Investors operating virtually often made allocation decisions based on research done before the lockdowns or used systematic techniques that ended up favoring experienced managers over newbies.
But the quality of new funds was high, according to the firm. “We saw first-tier launches, with funds that have working capital for two to three years minimum. And you're are seeing a lot of partners’ capital being put into the business.”
Caplis added that the new hedge fund structures are marked by creativity. Some of these funds’ early investors, for example, are taking stakes in the GP or getting revenue shares. Other early investors are getting deals where they pay full fees until a fund reaches a certain level. Then their management fees may go to zero, leaving them to pay only incentive fees.
“We’re seeing much more creativity in these launches. But even then, it’s hard. The barrier to entry is as high as it’s ever been,” said Caplis.