Industry Updates

New hedge fund launches accelerate in 2010 as liquidations and incentive fees decline

Thursday, March 03, 2011

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Opalesque Industry Update - New hedge fund launches continued at a steady pace through the end of 2010, as new fund offerings outpaced fund liquidations for the first time since 2007, according to data released today by HFR Hedge Fund Research, Inc., the leading global provider of information and analysis of the hedge fund industry. New hedge fund launches totaled 935 in 2010, topping each of the prior two years and completing the best year for launches since 2007, when nearly 1,200 new hedge funds launched. The fourth quarter saw 220 new funds launched, completing a strong calendar year despite being the second lowest quarterly launch total in the last six quarters.

Hedge fund liquidations totaled 743 in 2010, the fewest since 2007 and nearly half of the record calendar year liquidation total of 1,471 set in 2008. The fourth quarter saw only 158 funds liquidate, the lowest total since 4Q07 and only approximately 20 percent of the record total of 778 funds which liquidated two years earlier in the volatile 4Q08.

Performance dispersion narrows on lower volatility
Performance dispersion between the best the worst performing hedge funds narrowed considerably in 2010 from the staggering levels of 2008 and 2009, with only 58 percentage points of performance separating the average of the top and bottom deciles of hedge fund industry returns for the year. The HFRI Fund Weighted Composite Index, a proxy for broad industry returns, returned +10.3 percent for 2010, the top decile of funds returned an average of +43.2 percent while the bottom decile declined by -14.6 percent. Performance dispersion reached a record level of 116 percentage points in 2009 when the top decile gained an average of 100 percent; in 2008, dispersion was approximately 103 percent as the bottom decile lost a record -62.4 percent.

Top industry service providers remain entrenched; hedge fund fees decline
J.P. Morgan and Goldman Sachs remained the top prime brokers to the hedge fund industry; with 19.7 percent of funds listing Goldman Sachs as prime broker while J.P. Morgan is listed as prime broker for 29.3 percent of all hedge fund assets. Citco Fund Services; Schulte, Roth & Zabel; and Pricewaterhouse Coopers were each top service providers (based on hedge fund industry AUM) for administration, legal and auditing, respectively.

Average hedge fund incentive fees continued to decline, falling to 18.95 percent industry wide, the lowest level since HFR began tracking aggregate industry fee structure; average management fees were unchanged at 1.58 percent. “New hedge fund launches and liquidations in 2010 reflect dynamic shifts in the landscape of the hedge fund industry which will define the next decade of industry growth and evolution,” said Kenneth J. Heinz, President of HFR. “The modern hedge fund industry encompasses strategic exposures not only to equity and fixed income markets, but to specialized currency, commodity, inflation protection, energy, and securities issuance trends through accessible, transparent vehicles supported by leading global financial institutions.”

(press release)

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