09/15/2016 Market Commentary

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Small, mid-sized funds outperform large in 2nd quarter; Hedge fund industry capital remains slightly below record level
CHICAGO, (September 15, 2016) – Hedge fund launches and liquidations both declined in the second quarter, as hedge funds posted steady gains through a volatile quarter, driven largely by the Brexit vote. New hedge fund launches totaled 200 in 2Q 2016, down slightly from 206 in the prior quarter and 252 in 2Q15, according to the latest HFR Market Microstructure Report, released today by HFR®, the established global leader in the indexation, analysis and research of the global hedge fund industry. Hedge fund liquidations totaled 239 in 2Q 2016 compared to 291 in the prior quarter and 200 liquidations in 2Q 2015.
Liquidations exceeded launches for the third consecutive quarter, but the recent data shows the narrowest margin of contraction (39 funds) of the trailing three quarters. In the first half of 2016, the 530 fund liquidations exceeded the 406 new fund launches, with liquidations on an annual pace for the second-largest total since HFR began tracking this data in 1996. At the current pace, launches would also represent the lowest new launch total since 2009, when 784 funds were started. As previously reported by HFR, total hedge fund industry capital as of mid-year was $2.898 trillion, approximately 2.4 percent below the record $2.969 trillion from 2Q15.
Average industry-wide fees were unchanged from the prior quarter, although new fund launches reflected declining fees. The overall average hedge fund management fee remained at 1.50 percent as of 2Q, while the average incentive fee stood at 17.6 percent. However, the average management fee of new launches fell to 1.45 percent, down from 1.48 percent the prior quarter, while the average incentive fee of new launches fell to 1.45 percent, down from 1.48 percent the prior quarter, while the average incentive fee of new launches declined to 17.89 percent, representing a 61 bps decline from 1Q16.
HFRI performance dispersion declined in 2Q as returns for both the top and bottom deciles rose over the prior quarter. The top decile of HFRI performance gained an average of +13.7 percent in the quarter, while the bottom decile declined -7.6 percent, expanding from averages of +12.1 and -13.2 percent, respectively, in 1Q16. Over the last four quarters, dispersion declined slightly compared to calendar year 2015, as the top HFRI decile gained +19.3 percent, while the bottom decile fell an average of -25.8 percent, a dispersion of 45.1 percent. This represents a narrow decline from the FY 2015 HFRI performance dispersion of 45.5 percent.
Small and mid-sized hedge funds (AUM below $1 billion) have outperformed larger, established managers (AUM > $1 b) in both 2Q and YTD 2016. The HFRI Fund Weighted Composite Index® gained +1.8 percent in 2Q16, contributing to a YTD gain of +3.5 percent through August, topping the MSCI World Index over the same period, as well as the HFRI Asset Weighted Composite Index, which has gained +0.5 percent YTD. Funds with AUM below $1B gained +1.85% in 2Q and +3.6 percent YTD through August, while funds with AUM greater than $1B gained +1.55% in 2Q and +2.1 percent YTD.
“The number of launches narrowly declined though average launch size rose, while liquidations fell from elevated levels of the prior two quarters, though remained at a historically high level in 2Q as hedge funds produced steady gains through mid-year,” stated Kenneth J. Heinz, President of HFR. “The current ultra-low interest rate environment continues to be challenging for new fund launches, with intense competition to differentiate strategies, while fees remain a critical focus for investors. In this environment, hedge funds, regardless of size or maturity, which are able to differentiate their strategies with compelling performance and competitive terms, are likely to attract new investors capital and lead industry growth in 2H16.”