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578 hedge funds launched in H1-2011, assets reach record level of $2.04tln as fees decline

Wednesday, September 14, 2011
Opalesque Industry Update - Hedge fund launches outpace liquidations as industry assets reach record level
Average incentive fees continue to decline;
Fund performance dispersion rises, reversing recent trend

New hedge fund launches in the second quarter of 2011 totaled 280, a slight decline from the 298 new funds that were launched in the first quarter, according to data released today by HFR in the latest edition of Market Microstructure Report: 2Q11.

The first half launch total of 578 was the strongest six months since the first half of 2007, as total hedge fund industry capital reached a record level of $2.04 trillion.

Fund liquidations in 2Q totaled 191, a slight increase from the 1Q total of 181; the liquidation total for the second quarter represents an attrition rate of 2.07 percent.

Investors exhibited a preference for direct investment in single-manager vehicles, as opposed to commingled fund of funds (FOF). Single-manager launches accounted for 245 of the launches in 2Q11, the highest level since 2Q07, while FOF’s experienced a net decline, with 53 liquidations and only 35 new launches.

Lower Fees, Higher Volatility
Both management and incentive fees charged by hedge funds declined in 2Q, with incentive fees posting a more significant decline. Average incentive fees industry-wide declined to 18.81 percent in 2Q (from 18.95 percent in Q1); however, the average incentive fees of funds launched in the trailing 12 months was 17.56 percent, the lowest level since 2005. Average hedge fund management fees posted a narrow decline of 1 bp to 1.57 percent, while FOF management fees were unchanged at 1.3 percent.

Performance dispersion between best and worst performing deciles of funds in the trailing 12 months rose to nearly 61 percent, reversing a trend of narrowing dispersion from prior quarters when volatility declined. The top performing decile gained an average of +48.2 percent over the trailing 12 month period, while the bottom decile declined by -12.7 percent. Recent performance dispersion represents an increase over prior quarters, however this remains well below the peak of over 116 percent observed in 2009.

“The first half of 2011 was a strong environment for new hedge fund launches, with the industry on pace to approach the full year total of nearly 1,200 launches in 2007,” said Kenneth J. Heinz, President of HFR. “While lower fees continue to be supportive of this growth trend, the evolution of fund transparency is also a significant factor driving new fund launches. As volatility has increased throughout 3Q, we expect fund launches to continue to appeal to these investor preferences, as hedge funds position for strategic growth and take advantage of tactical opportunities created by these volatile market conditions.”

(press release)

HFR (Hedge Fund Research, Inc.) is the global leader in the alternative investment industry. Established in 1992, HFR specializes in the areas of indexation and analysis of hedge funds. HFR Database, the most comprehensive resource available for hedge fund investors, includes fund-level detail on historical performance and assets, as well as firm characteristics on both the broadest and most influential hedge fund managers.


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