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Hedge fund launch total at lowest level since 2000, HFR says

An estimated 561 hedge funds were launched in 2018 while 659 were liquidated over the course of the year, representing the lowest launch total since 2000, data from Hedge Fund Research showed.

In the fourth quarter alone, there were 111 launches and 215 liquidations, marking the second consecutive quarter in which liquidations outpaced launches, reversing a four-quarter trend of net growth in the number of funds.

"Despite performance gains across larger macro and credit multistrategy funds, powerful risk-off sentiment and a steep drop in investor risk tolerance as financial market volatility surged" in the fourth quarter inhibited hedge fund launches near the end of the year, said HFR President Kenneth J. Heinz in a news release. This "resulted in the lowest quarterly launch total since 4Q 2008 and lowest annual launch total since 2000," he added.

The total number of fund closures represented a decline from the 784 funds that closed in 2017. The calendar-year liquidation total also represents the lowest closure total since an estimated 563 funds shut down in 2007.

The HFRI Asset Weighted Composite index fell 2.37% in the fourth quarter, as U.S. equities declined 13.5%. The trends of hedge fund outperformance over equities, as well as larger industrywide hedge fund outperformance, dominated 2018 as the HFRI AWC index fell only 0.67% for the year, while U.S. equities declined 4.4%.

Large macro and credit multistrategy funds led hedge fund industry performance for 2018, with the HFRI Relative Value (Asset Weighted) index advancing 0.73%, while the HFRI Macro (Asset Weighted) index gained 1.61% for the year, leading all main strategies in 2018.

"While investor risk appetite has returned in early 2019, the environment remains challenging for new fund launches, with increasingly institutional capital sources indicating preference for established funds, new launches by established firms or demonstrated performance track record combined with rising investor capital bases," Mr. Heinz added. "The volatile year end is likely to accelerate the institutional investor pressures for lower fees and greater liquidity, as well as performance, with conformity of these trends driving industry growth through 2019."