09/27/2019 Market Commentary

Download PDF:

Fund liquidations fall but remain elevated; Incentive fees for new launches also decline
CHICAGO, (September 27, 2019) – New hedge fund launches increased for the second consecutive quarter, with launches through mid-year 2019 on a pace that could see the industry top launches from calendar year 2018. Launches totaled an estimated 153 in 2Q19, bringing the 1H total to 289 new funds, 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. 
The 1H19 launches put the industry on pace to top the 561 launches from last year, which represented the lowest annual total for new funds since 2000. 
Fund liquidations declined but remained elevated on a calendar year basis, with liquidations falling to 186 funds, down from 213 in 1Q19. 1H19 liquidations totaled 399 funds, the highest annualized pace of liquidations since 1,016 funds closed in 2016.  2Q19 also represents the fourth consecutive quarter in which liquidations exceeded launches, although the net decline of -33 funds in in the industry was smaller than the prior quarter.
The HFRI Fund Weighted Composite Index® (FWC) advanced +7.4 percent YTD through August 2019, led by the +9.8 percent gain in the HFRI Macro (Total) Index. The HFRI FWC performance through August represents the highest return in the first eight months of a year since 2000, while the Macro Index performance is the highest over that time frame since 2003.
Hedge fund performance dispersion continued to narrow in 2Q19, as the top decile of HFRI constituent performance (+10.1 percent) declined sharply from the top decile in 1Q19 (+21.1 percent), while the bottom decile of constituents in 2Q (-6.2 percent) was only slightly below the bottom decile in 1Q (-5.8 percent). The top/bottom dispersion of 16.5 percent in 2Q19 represents a dispersion decline of over 1000 basis points over the 1Q dispersion of 26.9 percent. The 12-month rolling decile dispersion also narrowed over calendar year 2018, with both top and bottom deciles improving: the top HFRI decile gained +21.9 in the trailing 12 months ending 2Q, while the bottom decile fell -17.4 percent over the same period, implying a dispersion of 39.3 percent and representing a decline of nearly 350 basis points from the FY 2018 performance dispersion of 43.4 percent.
Average hedge fund management fees industry-wide 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 fell by 1 basis point to an estimated 1.40 percent, while the average incentive fee fell narrowly by 10 bps to 16.5 percent. 
The estimated average management fee for funds launched in 2Q19 was 1.25 percent, a slight increase of +6 bps from the 1Q launch average of 1.19 percent. The average incentive fee for funds launched in 2Q19 was 15.65, a decline of 225 bps from the 2018 launch average incentive fee of 17.90 percent.
 “Early 2019 risk-on trends moderated through mid-year on increased political and economic uncertainty, including Brexit, uncertain trade negotiations, competitive currency devaluations and persistently negative interest rates. As this uncertainly has increased, hedge fund launches have also increased as investors position for additional shifting in macroeconomic and geopolitical financial market environment,” stated Kenneth J. Heinz, President of HFR. “Global fixed income markets maintaining a supply of $16 trillion on negatively yielding bond represents a temporary market disequilibrium and both an opportunity, as well as a risk for hedge funds managers, particularly interest rate-sensitive Macro hedge fund managers.”
“As previously noted, the W-shaped financial market environment continues to dominate financial markets, with strong intermediate term trends contributing to strong performance of quantitative trend-following strategies in recent months,” added Heinz. “Institutional investors are likely to exhibit increased sensitivity to duration associated with elevated risks resulting from ultra-low or negative interest rates, positioning in both tactical and effectively rate-hedged funds for a sharp adjustment or dislocation which may occur in coming months.”