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Hedge fund launches increased in Q1 amidst inflationary pressures

Thursday, July 01, 2021
Opalesque Industry Update - New hedge fund launches increased in the first quarter of 2021 to the highest level since 4Q17 as hedge funds posted strong performance to begin 2021 and inflationary pressures have begun to emerge in the US, according to the latest HFR Market Microstructure Report, released by HFR.

New hedge fund launches increased to an estimated 189 in 1Q2021 and exceeded the estimated number of liquidations for the third consecutive quarter, following eight consecutive quarters of contraction. Launches in 1Q exceeded the 4Q estimate of 175 new funds, implying an annualized launch rate well in excess of the FY 2020 launches to 539, a period which included a record low number of launches in 1Q20 as the global pandemic began.

Fund liquidations also increased modestly in 1Q21 to 159, a slight uptick from the prior quarter but also marking a decline of nearly 50 percent from the 304 liquidations in 1Q20. First quarter liquidations would imply an annualized liquidation rate of approximately 600-650 funds, which would be well below the two prior year liquidation totals of 770 and 739 in 2020 and 2019, respectively.

Strong launch and HFRI performance trends are expected to accelerate through mid-2021, as paced by the best starting performance to a calendar year since 1993. The investable HFRI 500 Fund Weighted Composite Index jumped +8.8 percent YTD through May 2021, while the HFRI Fund Weighted Composite Index surged +9.7 percent. Over the trailing 8-month period (since beginning of 4Q20), these Indices have gained +19.37 and +21.68 percent., respectively. The HFRI 500 Event-Driven Index has led strategy performance YTD with a +11.7 percent return through May, while the HFRI Equity Hedge (Total) Index has led strategy-level performance over the trailing 8-month period, vaulting +27.8 percent.

As previously reported by HFR, total hedge fund industry capital surged to a record $3.8 trillion in 1Q 2021.

The 12-month rolling HFRI decile performance dispersion exploded as the top decile surged to a record to begin 2021. The top HFRI decile rocketed to a gain of +126.8 percent in the trailing 12-month period ending 1Q21, the highest rolling 12-month top decile average return on record and more than doubling the calendar year 2020 top decile average return of +60.3 percent. The bottom decile of index constituents declined an average of -12.4 percent in the trailing 12 months, cutting in half the calendar year 2020 bottom decile decline of -24.8 percent. In 1Q2021, the top decile gained an average +29.7 percent, while the bottom decile fell -8.4 percent, resulting in a top/bottom dispersion of 38.1 percent.

Average hedge fund management fees again remained flat from the prior quarter industry-wide at an estimated 1.37 percent, while the average incentive fee declined 15 basis points to end 1Q at 16.20 percent. Both estimated fees represent the lowest level since HFR began publishing these estimates.

For new funds launched in 1Q21, the estimated average management fee increased to 1.4 percent, slightly above the industry-wide average of 1.37, and also above the estimated average mgt. fee of 1.24 percent for funds launched in the prior quarter (4Q20). The average incentive fee for funds launched in 1Q21 was an estimated 17.1 percent, above the total industry-level average of 16.2 but below the average incentive fee of 17.25 for funds launched in calendar year 2020.

"Strong HFRI performance accelerated industry growth to begin 2021, including both new fund launches and a record level of total industry capital as investors positioned for trends toward increasing inflationary pressures and surging trading volumes from individual investors. Continuing the trend from the prior quarter, an increase in trading volume from retail investors and a renewed interest in strategies focused on both out-of-favor, deep value equites, as well as stocks with high short interest, have increased idiosyncratic equity volatility in recent months," stated Kenneth J. Heinz, President of HFR. "Powerful, record performance by the top decile of the HFRI led the recent surge, with a combination of Equity Hedge and Event-Driven strategies contributing to overall HFRI gains. In addition, uncorrelated Macro strategies and interest rate- sensitive Relative Value Arbitrage strategies have also advanced, representing important capital preservation as investor attention has shifted toward expectations for higher interest rates and rising inflationary pressures. Managers positioned for these powerful trends are likely to lead industry performance and growth in 2021."

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