In at least one respect, the financial world is back to where it was before the 2008 crisis. A total of 125 hedge funds liquidated in the three months through June of this year, according to data provided by Hedge Fund Research (HFR). The second quarter of 2018 marked the fourth consecutive quarter in which hedge fund launches exceeded fund liquidations, although the numbers were both smaller for the previous quarter than they had been before that time. This continues a trend in which hedge fund closures have been declining since 2017.
125 Vs. 222
In the second quarter of 2017, 222 hedge funds closed. This is nearly 100 more closures than took place for the analogous time period in 2018. The 125 closures last quarter marked the lowest quarterly total since the third quarter of 2007. At the same time, 148 funds launched last quarter; this was down somewhat from 180 launches which took place a year prior.
Equity Hedge Leads the Charge
Equity hedge strategy funds have led gains in the technology, healthcare and energy sectors, according to the report. The HFRI Fund Weighted Composite Index has gained 1.8% year-to-date through August of 2018. The report also notes that event-driven and relative value arbitrage funds have contributed to overall industry gains. In particular, the HFRI Equity Hedge (Total) Index returned 2.3% for the year 2018 through August; the HFRI EH: Healthcare Index climbed by 14.5% for the same period.
Low Fees in Spite of New Funds
HFR found that hedge fund management and incentive fees last quarter were, on average, at their lowest levels since 2008. However, at the same time, newly launched funds had increases in average fees over previous quarters. Average management fees across the hedge fund space remained steady at 1.43%, while average incentive fee declined slightly to 16.98%. On the other hand, funds launched last quarter had an average management fee of 1.46% and an average incentive fee of 18.44%, each higher than the previous quarter and the analogous quarter in 2017.
HFR President Kenneth J. Heinz suggested that "hedge fund industry growth and performance has been steady through mid-2018, as the tension between U.S. economic growth and U.S. equity dollar gains has not only contrasted with slower growth or weakness in non-U.S. regions, but the disparity has widened in recent months." Heinz adds that "hedge fund positioning has continued to defensively and opportunistically shift away from the equity beta that dominated 2017 to encompass more neutral-biased, arbitrage positioning across export and trade-sensitive exposures while maintaining a cautious outlook toward mean-reverting currency trades and EM volatility while maintaining core exposures to specialized areas such as U.S. technology."