Hedge Fund Launches Outpace Liquidations in Q1: HFR
Posted by Colin Lambert. Last updated: July 1, 2021
New research from indexation, research and analysis firm HFR, finds that hedge fund launches hit their highest level in the first quarter of 2021 since Q4 2017. The study also found that liquidations also increased, but at a diminishing rate.
The research comes against a background of strong hedge fund performance, the HFR Index has recorded its strongest start to a year since 1993 – HFR says it expects launch and performance trends to accelerate through the middle of the year.
New hedge fund launches increased to an estimated 189 in the first quarter and exceeded the estimated number of liquidations for the third consecutive quarter, following eight consecutive quarters of contraction. Launches in Q1 exceeded the Q1 estimate of 175 new funds, implying an annualised launch rate well in excess of the FY 2020 launches to 539, a period which included a record low number of launches in Q1 2020 as the global pandemic began.
Fund liquidations increased to 159, a slight uptick from the prior quarter but also marking a decline of nearly 50 percent from the 304 liquidations in Q1 2020. First quarter liquidations would imply an annualised 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, HFR says.
Average hedge fund management fees again remained flat from the prior quarter industry-wide at an estimated 1.3%, while the average incentive fee declined 15 basis points to end Q1 at 16.2%. Both estimated fees represent the lowest level since HFR began publishing these estimates.
For new funds launched in the first quarter, the estimated average management fee increased to 1.4%, slightly above the industry-wide average of 1.37%, and also above the estimated average management fee of 1.24% for funds launched in the prior quarter. The average incentive fee for funds launched was an estimated 17.1%, 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,” says Kenneth Heinz, president of HFR. “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-favour, deep value equites, as well as stocks with high short interest, have increased idiosyncratic equity volatility in recent months.
“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,” he adds. “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.”