Hedge-fund launches drop to lowest level since 2008

Despite a steady flow of new European-based funds, hedge-fund launches in the third quarter of this year have fallen to the lowest level since 2008, according to research firm HFR.

The HFR Market Microstructure Report counted an estimated 102 launches in the quarter, bringing the total for the year to 391 new funds.

“The year-to-date launch total puts the industry on pace to fall below 500 new launches for 2019, which would represent the lowest annual total for new funds since 328 funds launched in 2000,” HFR said.

About 75% of new funds launched this year are located in Europe.

“New fund launches fell in 3Q19 as global equity markets temporarily paused strong YTD performance, with the launch decline reversing a trend of launch increases in the first half of the year,” said Kenneth Heinz, president of HFR.

“Following the 3Q decline in risk tolerance, risk-on behaviour has reasserted itself into 4Q as volatility associated with certain components of trade negotiations, Brexit and political uncertainty has subsided driving US equities to record highs.”

Fund liquidations, on the other hand, are on pace to exceed last year’s liquidation total of 659, after 540 funds closed doors in the first nine months of 2019.

However, this would also represent the second-lowest calendar year liquidation total since 2007, HFR said. Liquidations have exceeded launches in each of the last five quarters, but the net decline is slowing.

Heinz said, “While it is likely for launches to resume the 1H19 trend in 4Q19 as a result of the increased investor risk tolerance, it is also likely for launches to rise and liquidation to continue to fall as institutional investors position for increasing geopolitical risks in 2020, with these led by the US election, Brexit, and inevitable interest rate increases from suppressed or, in many cases, still negative levels.

“Funds positioning for these risks and opportunities are likely to lead performance and attract investor capital for both new and existing products in early 2020.”

Hedge funds on average are set to register the best performance since 2010 with the HFRI Fund Weighted Composite Index gaining 8.5% to date.

The traditional ‘2 and 20’ fee model for hedge funds is no longer accurate for new funds, HFR data shows.

The average management fee for funds launched this year is 1.23% and the average incentive fee is 17.05%.

The Cayman Islands is the world’s main centre for hedge funds, although it has seen its share of new fund launches steadily declining.

In the first nine months of 2019, the number of funds licensed by the Cayman Islands Monetary Authority dropped slightly, by 0.5% from 10,992 to 10,937.

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