Hedge fund launches on the rise

New hedge fund launches are at their highest level since 2017, according to HFR’s Market Microstructure Report released today.

The figures showcase an industry that is holding above its $4 trillion asset milestone that it hit last year as an estimated 614 new funds were launched in 2021. In 2017, roughly 735 funds were launched, HFR figures show.

In the fourth quarter, net asset flows were positive in relative value strategies, propelling the segment to make up roughly 26% of overall industry assets, according the HFR’s research report.

The total number of hedge funds now stands at 9,254, which in total is on par with last year’s figures, but shy of the all-time industry record of 10,096 set in 2006 when many in industry expected a culling to take place even as institutional investors were growing their exposure to hedge fund strategies.

“New hedge fund launches in 2021 exceeded totals from each of the prior three years, while liquidations fell to its lowest level since 2004, when industry capital was less than a quarter of the current level,” observed HFR President Kenneth Heinz. “Strong growth trends continue to be driven by rising geopolitical and macroeconomic uncertainty, with institutional investors positioning for this uncertainty and looking for portfolio capital protections. These concerns from the prior year have only been increased by the early 2022 volatility and expectations for significant interest rate increases.”

Last year’s strong 9.9% return for the investable HFRI 500 Index is part of the growth story. The strong defensive capital preservation over the volatile start to 2022, topping equity market losses with a narrow decline of -1.2% through February will certainly help. Uncorrelated macro strategies have led performance so far in 2022, advancing 3.8% through February, with strong gains across fundamental discretionary, commodity and systematic trend-following strategies.

Heinz views the gains in uncorrelated macro strategies this year as a positive trend for macro funds and the industry as a whole, in which he expects an increasing institutional capital inflow trend to take place through mid-year.

HFR estimates 527 funds were liquidated in 2021, which as Heinz said was the lowest total since 2004 when 296 funds liquidated. Total industry capital was $973 billion in 2004 though and in contrast to over $4 trillion. Factors contributing to the slowdown in liquidations include the recent uncertainty in the global markets general inflation, increased government spending, rising interest rates and increased geopolitical tensions, officials said.

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