HFR: Hedge fund launches outpace liquidations for fourth straight quarter

Hedge fund launches exceeded hedge fund liquidations for the fourth quarter in a row, but the total number of launches was the lowest since the fourth quarter of 2008 during the global financial crisis, according to data from Hedge Fund Research released Thursday.

In the quarter ended June 30, 148 new hedge funds started trading, down 6.3% from 158 launches the previous quarter and down 17.8% from 180 funds in the second quarter of 2017.

The volume of hedge fund launches in the quarter ended June 30 was the lowest since the fourth quarter of 2008, when just 56 funds began operations, HFR data confirmed.

The number of launches in the year ended June 30 was down to 672 funds from 692 funds the previous year.

Hedge fund liquidations, on the other hand, continued to slow, with HFR data showing 125 fund closures in the quarter ended June 30, the lowest level of fund closures since the third quarter of 2007 when 105 funds were shuttered.

Hedge fund closures in the second quarter this year were down 13.8% from 145 funds in the previous quarter, and down 43.7% from 222 funds that went out of business in the second quarter of 2017.

In a year-over-year comparison, the number of liquidations in the year ended June 30 — 573 — was dramatically lower than the 1,008 hedge funds that ceased operations in the year ended June 30, 2017.

Sources said current conditions are extremely tough for hedge fund manager launches, which they said partially explains declining levels of new funds hitting the market.

"It's one of the most difficult environments I've seen for new launches. The cost of launching has risen dramatically due to new regulations, enhanced focus on operational due diligence," said Jacob Walthour Jr., CEO and partner of Blueprint Capital Advisors, which offers an investment platform for investment in small, niche-focused credit hedge fund managers.

Investor preferences have changed and "you can't rely on finding a substantial anchor investor, particularly family offices," which for many years were the main source of startup capital for new hedge fund managers, Mr. Walthour said.

"Unless you have a big name and a pedigree coming from having worked at a very well-known hedge fund company" or run a differentiated, diversifying hedge fund strategy, fundraising is "very difficult" said Daniel Stern, senior managing director and head of the hedge fund research team at alternatives consultant Cliffwater.

HFR also found that hedge fund fees remained at their lowest levels since HFR began estimating management and performance fees in 2008.

The average industrywide management fee remained unchanged at 1.4% in the quarter ended June 30, and the average performance fee fell 13 basis points to 16.98%.

"Institutional investors continue to expand alternative allocations while carefully considering fundamental aspects of fees and liquidity … strategically balancing the risks associated with the fluid impacts of trade and tariff discussions while carefully considering fundamental aspects of fees and liquidity on portfolio performance," said Kenneth J. Heinz, HFR president, in a news release accompanying the firm's hedge fund launch and liquidation data.