Hedge Fund Launches Best Liquidations In Q3

Dec 10 2009 | 1:38pm ET

New hedge fund launches exceeded the number of liquidations in the third quarter of 2009 for the first time since the acceleration of the financial crisis in mid-2008, according to a new report released by Hedge Fund Research. 

New hedge fund launches totaled 224 in 3Q09, bringing the YTD total to 554. The number of new launches remains well below the average of 1,400 annually that was observed between 2002 and 2007, but nonetheless is on pace to exceed the 2008 total of 659, according to the HFR Market Microstructure Industry Report

The decline in the number of liquidations also continued, with 190 funds liquidating in 3Q09, bringing YTD total industry liquidations to 858. Despite the drop in liquidations for the third quarter, fund liquidations for 2009 have already made the current calendar year the second highest on record for fund closures, exceeding the 2005 total when 848 funds closed. The record number of hedge funds liquidated in 2008, when 1,471 funds shut down. 

Of the four main strategies, Equity Hedge saw the most liquidations with 67, while Macro saw the most launches, with a total of 65. Funds of funds experienced liquidations totaling 69 for the quarter, along with 51 launches.  

The trend of concentration of hedge fund industry service providers diverged by type of provider in 3Q09. The largest prime broker by assets increased their market share, while the top administrator, legal advisor and auditor all experienced market share declines from one year ago.  

Average Management Fees Remain Unchanged

The HFRI Fund Weighted Composite Index has gained 18.8% YTD through November, this after a record decline of 19.03% in 2008. Inclusive of this gain, the industry, in total, is within 5.7% of its previous performance high watermark, set in October 2007.

Through the end of 3Q09, 32.5% of funds had reached their respective performance high watermarks; most funds receive an incentive fee only for performance gains above their high watermark.  

Average management fees were unchanged across three of the four main strategy areas, with only Relative Value strategies posting a slight decline (of one basis point); the average management fee charged across all strategies was 1.58%.

Average incentive fees declined in Macro and Relative Value strategies, while Equity Hedge and Event Driven strategies experienced increases; the average incentive fee across all strategies was 19.21%.

Funds which charge higher management fees have outperformed funds charging lower management fees (both net of fees) over the last 5 years, though results are mixed over shorter timeframes.  

“As the hedge fund industry approaches pre-crisis performance levels, the significance of the structural evolution that the industry has experienced has become increasingly clear,” said Ken Heinz, president of HFR. “While 16% of all funds have closed in the last year, a new generation of funds has emerged into an investor environment dominated by structural and strategic considerations of liquidity, transparency, risk management and inflation protection. Both new and existing funds are continuing to respond to these institutional requirements.”  


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