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HFR: Hedge fund liquidations fall to pre-crisis levels as launches increase in Q4-09, average incentive fees decline

Wednesday, March 10, 2010
Opalesque Industry Update – The number of new hedge fund launches increased in the fourth quarter of 2009, even as the pace of liquidations continued to decline, according to data released today by Hedge Fund Research, Inc., the leading provider of data and analysis of the hedge fund industry.

During Q4 2009, an estimated 230 funds launched while 165 liquidated, continuing the momentum from Q3 09 when launches outpaced liquidations for the first time since the start of the financial crisis. For the FY 2009, liquidations outpaced launches, as over 1,000 funds liquidated, while nearly 800 new funds launched. 2009 was the second consecutive calendar year in which liquidations exceeded launches; in 2008, a record 1,471 funds liquidated while only 659 launched.

Average incentive fees decline, funds employ low leverage
Average incentive fees have declined since the start of the financial crisis, with the decline being more pronounced in Funds of Hedge Funds (FOFs). Incentive fees for single manager funds fell to 19.2 percent (versus 19.34 percent in Q1 08) while FOFs fell to 6.9 percent (versus 8.05 percent in Q1 08). The average incentive fee for funds launched in 2009 was 17.6 percent, 1.6 percent below the broader industry average.

Post-Financial Crisis, hedge funds are characteristically employing low levels of leverage, with approximately 40 percent of single manager funds employing no leverage, while approximately 52 percent utilize leverage between one and two times their investment capital. For futures trading funds, more than three quarters of funds employ less than 20 percent margin to equity ratios.

Top funds average triple digit performance gains
As a function of the volatility and recovery of the last two years, both 2008 and 2009 saw increased dispersion between the best- and the worst-performing funds. The top performing decile (10 percent) of hedge funds returned an average of 100 percent in 2009, while the bottom decile lost an average of16.5 percent. This contrasts with 2008, when the top decile gained 40.9 percent, while the bottom decile lost 62.4 percent. Eighty percent of funds posted positive performance in 2009, while approximately thirty percent were positive in 2008.

In response to institutional investor demand, many hedge funds have also recently launched UCITS III compliant fund vehicles, which adhere to specific risk parameters and allow products approved by a single EU regulator to be distributed throughout the region. HFR estimates that there are now more than 250 UCITS III compliant fund vehicles available, and has included these funds in its HFR Database product.

“The financial crisis and subsequent recovery have impacted and reshaped nearly every aspect of finance, and the process of recovery in still ongoing in the hedge fund industry,” said Ken Heinz, President of Hedge Fund Research Inc. “A number of firms were able to achieve outstanding results in 2009 amidst a very complex economic environment, but the landscape in terms of capital, strategies, service providers, fees, regulation, liquidity and transparency, has evolved significantly. These trends are likely to define the growth of the hedge fund industry in the next decade.”

Hedge Fund Research, Inc. (HFR) 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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