A March 20th report from Hedge Fund Research points out that the number of new hedge fund launches was down slightly again in 2014, the third down year in a row, but fund liquidations decreased for the first time since 2010. Also of note, smaller funds produced lower returns than larger funds on average last year, and management and incentive fees were also down fractionally.
Details from HFR’s report on hedge funds
The HFR report highlights that hedge fund launches came out to 1,040 last year, a drop off of 20 from the 1,060 funds founded in 2013. While launches have trended in range close to 1100 for some time now, the number is well below the 2,073 funds launched in 2005 (and nearly double the low of 659 launches in 2008).
Hedge fund liquidations were also down, as 864 funds closed in 2014, a 40-fund decline from the 904 fund liquidations in 2013. Before last year, hedge fund closures had moved up since 2010 when 743 funds closed their doors. Of note, the average asset size of funds liquidated in the fourth quarter of 2014 was $76 million 12 months before closing.
Hedge fund performance
Hedge fund performance dispersion also decreased last year. The average performance of both the top and bottom firms was down from 2013. While the HFRI Fund Weighted Composite Index was up 3% in 2014, the top decile of all HFRI constituents gained 27.37% for the year, a notable drop off from +41.6% in 2013. The bottom decile of the HFRI saw an average decline of -19.53% last year, below the bottom decile drop off of -18.93% in 2013.
Of particular note, the 46.9% dispersion between the top and bottom deciles is the lowest calendar year dispersion since HFR began following this metric back in 2000.
Hedge funds with assets more than $1 billion reported an average gain of +5.03% last year, very close to the 5.16% return of the average mid-sized fund ($250 million-$1billion). Funds with AUM between $50-$250 million were up 3.665, the smallest funds (less than $50 million) were only up 2.11%.
HFR also points out that hedge funds with at least $1 billion in assets have outperformed smaller funds (annualized) for the past three, five-, and ten-year periods.
Management and incentive fees for hedge funds
Average hedge fund industry management and incentive fees were down slightly in 2014, but fees for firms with 2014 fund launches were above those that launched in 2013. Average management fees were down by 3 basis points to 1.51%, while average incentive fees slipped -40 basis points to 17.8%.
Of interest, hedge funds launched last year had an average management fee of 1.57%, up from 1.42% among newly launched firms in 2013, but close to the last few years. In like fashion, funds launched in 2014 reported an average incentive fee of 17.35, an increase from 16.99 from 2013, but still the second lowest average incentive fee for new firms since 2003.