Hedge fund launches begin to outpace quarterly liquidations

Hedge fund research firm HFR reported that new hedge fund launches grew in the fourth quarter of 2020 to the highest level since the end of 2017 — riding the wave of U.S. economic gains and expectations for growth due to reopening.

In Q4, hedge fund launches grew to an estimated 175 and exceeded the estimated quarterly liquidations for the second consecutive quarter. This growth trend follows two years of quarterly industry fund launch contraction, according to the database provider. Equity hedge and event-driven hedge funds attracted the most inflows in the final quarter of 2020, according to HFR estimates.

Last year saw a healthy number of new launches overall, but it ended with a slight uptick in liquidations with 151 liquidations in Q4.  For the full year, hedge fund launches totaled 539, but that was countered with an estimated 770 funds liquidated. The liquidation stats outpaced 2019’s closure activity that totaled 738 funds. Still the highest number of fund liquidations on an annual basis was in 2017 when 784 funds shut down.

The bright spot is the growth in new hedge fund launches though, which has carried over into 2021 driven by some of the strongest performance gains since 2000, according to Kenneth Heinz, president of HFR.

As measured by the investable HFRI 500 Fund Weighted Composite Index, returns have remained strong. For the trailing four months ending February 2021, gains totaled 14.25%. The equity hedge funds led the way with gains of 21.9% over the same time period, while the HFR Cryptocurrency index saw a remarkable surge of 205.6%. 

“Volatile trends, including an increase in trading volume from retail investors and a renewed interest in strategies focused on both out of favor, deep value equities, as well as stocks with high short interest, have increased idiosyncratic equity volatility in recent months,” said Heinz. “Having navigated extreme dislocations and volatility in 2020, hedge funds are maintaining an intense focus on ongoing new strings of coronavirus as well as vaccination progress, while at the same time focusing on evolved risks for 2021 including interest rate sensitivity, increasing inflation expectations, and geopolitical tensions across North America, Europe and Asia.”

Assets are on the rise too. Total hedge fund industry capital swelled to a record $3.6 trillion to begin 2021. Asset outflows for the year stood at $29.6 billion, which was lower than the previous two years and is perhaps the harbinger of a more long-lived growth trend.

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