Hedge Fund Fees, New Launches Down In 2016

Certain hedge funds have taken it on the chin in 2016. New data from Hedge Fund Research (HFR) shows new launches down year-over-year amid a higher number of closings and steadily falling hedge fund fee revenue. The moves come as industry capital has risen to record levels, but 2017 could offer brighter prospects for active managers, HFR President Kenneth Heinz predicted.

 

hedge fund Launches

hedge fund Launches

Fund of funds managers sees consolidation as hedge fund fee revenue continues to drop

Total industry assets increased by +3.4% year-over-year, but the number of single-manager hedge funds declined -2.5%. The most precipitous decline occurred in the consolidating fund of fund space, which saw fund managers drop by -6.6%, according to HFR’s December 15 Hedge Fund Industry report.

In the third quarter 2016 there were 170 new launches, down by 30 from the third quarter 2015, mirroring a larger drop year over year.  A total of 576 funds have launched in the first three quarters of 2016, down 200 from the same period last year. The reduction in new hedge fund launches comes as the total number of hedge funds dropped below 10,000, to 9,925, while overall hedge fund management fees, on average, dropped 1 basis point to an average of 1.49% and the incentive fee dropped 10 basis points to an average of 17.5%.

Hedge funds have been under significant pressure for lagging the performance of the S&P 500 Total Return which is up 12.60% year to date. Kenneth J. Heinz, President of HFR, however, notes that hedge funds are generally outperforming international stock market averages. He expects 2017 could be a year of strong performance, particularly as mergers and acquisitions are expected to increase. Separately, 53% of fund managers surveyed think the election result will be positive for their business.

hedge fund Launches

hedge fund Launches

hedge fund Launches – Hedge fund index up 4.54% year to date as smaller funds outperform their larger brethren

The HFRI Fund Weighted Composite Index, which has a higher weighting to smaller hedge funds, is up 4.54% year to date as of November.

While the vast majority of assets under management are in larger hedge funds, it is the smaller funds that have been delivering performance. Small and mid-sized hedge funds with under $1 billion in management delivered 3.0% in the third quarter were up 4.7 percent year to date, compared to funds with over $1 billion were up 2.5% in the third quarter and 3.8% year to date.

The trend towards asset managers being willing to allocate to smaller funds appears to be changing, however. Heinz noted that investors are becoming more comfortable and willing to allocate to innovative, emerging managers as a complement to their more established holdings. “Investor risk tolerance has increased significantly since the US election,” he noted, saying in a statement that “continued macroeconomic uncertainty and favorable political policy evolution is likely to drive industry growth into early 2017.”

Event driven funds had generally strong November performance while relative value funds were among those with the lowest dispersion of returns volatility. The HFRI Relative Value Total Index is up 6.48% year to date, after having a difficult January and February when the stock market exhibited one of its two major “V” bottoms on the year. Some relative value players are known to deleverage as stock prices move lower, a risk parity risk management regime that can find difficulty when trend patterns reverse.

Fund of fund managers continued to slog through 2016, down -0.2% on the year. Major multi-manager funds such as Balyasny -1.6% Folger Hill -15% Senfina -24% are down on the year, Reuters Lawrence Delevingine reports, while Citadel is up 3.4% and Millennium positive by 2.6%.

Breaking down the numbers, the top performing hedge fund sectors year to date include Energy / Basic Materials-focused equity hedge funds, up 22.07% year to date, Event Driven Distressed / Restructuring funds are up 12.16% while HFR’s Relative Value Yield Alternatives sector is up 14.47% on the year. The worst performing sector is the HFRI Macro Systematic Diversified, which houses CTA strategies, down -2.31% on the year. The active trader’s sector, however, is up 3.87% year to date while commodity funds are up 4.33% over the same period.

HFRI performance dispersion was running steady for the third quarter, as top decile of performers were up 14.77%. The loss size of the bottom decile performers was -7.05 percent, which was an improvement over the average -7.6 percent in the second quarter. On a yearly basis the top HFRI decile was up 29.54 percent while the bottom decile fell an average of -15.57 percent, a dispersion of 45.1 percent which is in line with last year’s dispersion.