03/22/2019 Market Commentary

Fund liquidations decline to lowest level since 2007; Management fees hold at historical low, incentive fees mixed
CHICAGO, (March 21, 2019) – New hedge fund launches fell to conclude 2018, as the number of 4Q18 launches totaled only 111 in the volatile quarter, a decline of 33 over the prior quarter and a decline of 79 over 4Q17, 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. 
For the full year 2018, an estimated 561 hedge funds launched, representing the lowest launch total since 2000. 4Q18 represents the second consecutive quarter in which liquidations exceeded launches, reversing a four-quarter trend of net growth in the number of funds. 
Fund liquidations rose in 4Q18 to an estimated 215, the highest level since 2Q17, when 222 funds closed. Despite the uptick of liquidations at year-end, the total number of fund closures declined in 2018, as 659 funds liquidated for the year, representing a decline of 125 from the 784 funds that closed in 2017. The calendar year liquidation total also represents the lowest closure total since an estimated 563 funds closed in 2007.
The HFRI Asset Weighted Composite Index® (AWC) fell -2.37 percent in the volatile 4Q18, as US equities declined -13.5 percent. The trends of hedge fund outperformance over equities, as well as larger hedge fund outperformance industry-wide dominated 2018 as the HFRI AWC Index fell only -0.67 percent for the year, while US equities declined -4.4 percent. Large Macro and credit multi-strategies led hedge fund industry performance for 2018, with the HFRI Relative Value (Asset Weighted) Index advancing +0.73 percent, while the he HFRI Macro (Asset Weighted) Index gained +1.61 percent for the year, leading all main strategies in 2018. 
Hedge fund performance dispersion widened significantly in 4Q18, as the top decile of HFRI constituents averaged a return of +8.5 percent in 4Q18, while the bottom decline fell an average of -23.3 percent. This top/bottom dispersion of 31.8 percent represents an increase from the top/bottom decline dispersion of 20.4 percent in 3Q18. However, for FY 2018, HFRI performance dispersion contracted to 43.4 percent, down from a 51.8 percent top/bottom decline dispersion in 2017, as the top decline of 2018 constituents averaged a +17.0 percent return, while the bottom decile fell an average of -26.4 percent. 
Average hedge fund management fees remained at the lowest level since HFR began publishing these estimates in 2008, while the average incentive fee fell slightly from the prior quarter. The average management fee remained unchanged at an estimated 1.43 percent, while the average incentive fee fell narrowly by -3 bps to 16.90 percent. The average management fee for funds launched in 2018 was 1.29 percent, a decline of -5 bps from the 2017 launch average of 1.34 percent. The average incentive fee for funds launched in 2018 was 17.9 percent, an increase of +93 bps over the estimated average incentive fee of 16.97 percent for fund launched in 2017.
As reported previously, HFR estimates that only approximately 30 percent of all hedge funds currently charge equal to or greater than a “2-and-20” fee structure.
“Despite performance gains across larger Macro and credit multi-strategy funds, powerful risk-off sentiment and a steep drop in investor risk tolerance as financial market volatility surged in 4Q inhibited hedge fund launches into year end, resulted in the lowest quarterly launch total since 4Q08 and lowest annual launch total since 2000. Liquidations also declined in the year, indicating that more investors are remaining with funds in which they are currently invested,” stated Kenneth J. Heinz, President of HFR. “While investor risk appetite has returned in early 2019, the environment remains challenging for new fund launches, with increasingly institutional capital sources indicating preference for established funds, new launches by established firms or demonstrated performance track record combined with rising investor capital bases. The volatile year end is likely to accelerate the institutional investor pressures for lower fees and greater liquidity, as well as performance, with conformity of these trends driving industry growth through 2019.”