Hedge Fund Launches Exceed Liquidations for Second Consecutive Quarter

Mar 23 2018 | 3:53pm ET

Hedge fund launches exceeded liquidations in 4Q 2017 for the second consecutive quarter, and fees are at record lows, as total hedge fund industry capital began 2018 at a record $3.21 trillion, according to the latest report released by HFR Market Microstructure Report, which conducts research and analysis of the global hedge fund industry.

An estimated 190 funds launched in 4Q, up from 176 in 3Q and in line with the number of 4Q16 launches, bringing the full year 2017 total to 735 fund launches, the study found.

Hedge fund performance dispersion widened in both 4Q17 and FY 2017, with the average of the top decile posting the highest FY gain since 2013. The top decile of hedge funds was up an average of +13.4% in 4Q, while the bottom decile fell -5.8%, representing a dispersion of 19.2%. For FY2017, the top decile of funds averaged a +38.4% return, while the bottom decile fell an average of -13.4%, a one-year performance dispersion of 51.8 %.

Fund liquidations for 2017 were the lowest for a calendar year total since 775 funds liquidated in 2011. On a quarterly basis, fund liquidations totaled 166 in 4Q17, an increase over the 137 in the prior quarter, though representing a decline over the 4Q16 of 275 liquidations.

The study also found that fund liquidations declined sharply in 2017 as industry asset growth accelerated, with 784 funds closing in the year, representing a decrease of 25% from the 1,057 liquidations in 2016.

Other key data from the research include the following:

  • The HFRI Fund Weighted Composite Index® gained +8.6% in 2017 while not producing a negative month for the calendar year. Through February, the Index has added +0.6% YTD 2018, with early performance led by Equity Hedge and Technology exposures. The HFRI Equity Hedge (Total) Index was up +1.1 YTD through February, while the HFRI EH: Technology Index has climbed +4.9% over the two-month period.
  • Average hedge fund management and incentive fees began 2018 at the lowest level since HFR began estimating in 2008. Average management fees declined -1 basis point over the prior quarter to 1.44%, while the average incentive fee fell 10 bps to 17.0%. 
  • The average management fee for funds launched in 2017 was 1.34 percent, representing a slight increase over the 1.31% management fee for 2016 launches. However, the average incentive fee for funds launched in the 2017 declined to 16.97%, a drop of more than 40 bps from 2016 launches.


As reported previously, HFR estimates that only approximately 30% of all hedge funds currently charge equal to or greater than a 2-and-20 fee structure.


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