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Hedge fund launches decline to lowest level in 3 years in Q3, liquidations rise

Monday, December 16, 2013
Opalesque Industry Update, for New Managers - New hedge fund launches declined to the lowest level in nearly three years in the third quarter, while the number of hedge fund liquidations rose to the highest level since the fourth quarter of 2012, according the latest HFR Market Microstructure Industry Report, released today by HFR, the established global leader in the indexation, analysis and research of the global hedge fund industry. The trends in launches and liquidations occurred in Q3 as U.S. regulators proceeded toward approval of the Volcker Rule (which was recently approved this week), while launch trends have not been significantly impacted by the recent relaxation of hedge fund marketing restrictions associated with the JOBS Act.

New fund launches totaled 231 for the third quarter, declining from 288 in the prior quarter and 275 in the third quarter of 2012, representing the lowest quarterly launch total since the fourth quarter of 2010 when 220 funds were launched. A total of 816 new hedge funds launched in the first three quarters of 2013, narrowly trailing the 824 funds launched in the same period in 2012. In the trailing 12 months, 1,100 funds have launched, narrowly trailing the launch totals from calendar years 2011 and 2012. The record number of new fund launches occurred in 2005, when 2,073 funds launched.

Hedge fund liquidations increased to 222 funds in Q3, an increase from the 190 liquidations from the previous quarter and the 211 liquidations from the third quarter of 2012, representing the highest quarterly total since 238 funds liquidated in the fourth quarter of 2012. A total of 608 funds liquidated in the first three quarters of 2013, trailing the 635 liquidations from the first three quarters of 2012. In the trailing 12 months, liquidations totaled 846 funds, trailing the 2012 calendar year total of 873, but representing an increase over the 775 liquidations from 2011. The record number of fund liquidations occurred in 2008, when 1,471 funds liquidated.

Continuing the trend of prior quarters, average hedge fund management and incentive fees declined industry wide, with average management fees falling 1 basis point (bps) to 1.53 percent, while incentive fees declined 11 bps, to 18.2 percent. Similarly, management and incentive fees charged by the vintage of funds launched in 2013 were lower than those charged by funds launched in 2012. Funds launched in 2013 had an average management fee of 1.38 percent, a decline of 24 bps from 2012 launches, while incentive fees for 2013 launches averaged 17.17 percent, 57 bps lower than management fees charged by 2012 launches.

Hedge fund performance dispersion narrowly decreased over the prior quarter, although the trailing 12 month dispersion increased over 2011 and 2012 levels. The top decile of HFRI constituents gained +13.26 percent on average in the third quarter, while the bottom decile declined -8.26 percent, creating a decile dispersion of 21.5 percent, declining from the 22.8 percent of the prior quarter. In the trailing 12 months, the top decile of HFRI constituents gained +38.0 percent on average, while the bottom decile declined -19.2 percent, creating a performance dispersion of 57.2 percent, exceeding the 50.2 and 48.6 percent dispersion of each of the prior two calendar years.

“Hedge fund launches declined in the third quarter, as both managers, investors and financial institutions awaited the finalization and regulatory approval of the Volcker Rule, which includes provisions restricting proprietary trading by financial institutions, as well as restricting ownership of hedge fund firms by financial institutions,” stated Kenneth J. Heinz, President of HFR. “While the increased uncertainty has likely adversely impacted hedge fund launches in the short-term, over the intermediate to long term, the adoption of the rule is likely to result in increased hedge fund launches, as experienced investment professionals set up new funds utilizing their trading acumen. As a result of this, hedge funds are likely to expand in scope to assume an increasingly mainstream role in global capital markets, evolving the role of liquidity provision and proprietary trading into a codified, independent and risk-balanced investment strategy for sophisticated investors.”

Press release

HFR (Hedge Fund Research, Inc.) is the global leader in the alternative investment industry, specializing in the indexation and analysis of hedge funds. www.hedgefundresearch.com

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