New Hedge Fund Launches Fall Amid Worries Over Regulatory Scrutiny

The number of new hedge fund launches declined significantly in the third quarter amid worries over regulatory scrutiny particularly the Volcker Rule, which was recently approved by regulators.

According to the latest HFR Market Microstructure Industry Report, the total number of hedge fund launches for the third quarter was 231 compared with the 288 new hedge funds launched during the previous quarter. During the same quarter a year ago, the total number of hedge funds launched was 275.

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Hedge fund launches at all-time low

HFR noted that the current hedge fund launches is the lowest level since the fourth quarter of 2010. At that time, there were only 220 new hedge funds created.

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Over the past three quarter this year, 816 new hedge funds have been created, lower than the 824 new hedge funds recorded in the same period in 2012. Over the past 12 months, 1,100 new hedge funds were launched. According to HFR, the highest number of hedge fund launches happened in 2005.  The industry established 2,073 funds at that time.

Kenneth J. Heinz, president of HFR said, “Hedge fund launches declined in the third quarter, as both managers, investors and financial institutions awaited the finalization and regulatory approval of the Volcker Rule, which includes provisions restricting proprietary trading by financial institutions, as well as restricting ownership of hedge fund firms by financial institutions.”

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However, Heinz believes that despite the short-term adverse impact of regulatory uncertainties on hedge fund launches, the adoption of the Volcker Rule will likely result in increased hedge fund launches over the intermediate to long-term.

Volcker Rule works in hedge funds’ favor in the long term

“As a result of this, hedge funds are likely to expand in scope to assume an increasingly mainstream role in global capital markets, evolving the role of liquidity provision and proprietary trading into a codified, independent and risk-balanced investment strategy for sophisticated investors,” added Heinz.

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During the third quarter, the average hedge fund management and incentive fees declined by 1 basis point to 1.53% and 11 basis points to 18.2%, respectively.

According to HFR, the average management fee of funds launched in 2013 was 1.38%, down by 24 basis points and the average incentive fee was 17.17%, down by 57 basis points from last year.