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Hedge Fund Launches Continue To Fall

New hedge fund launches declined to a near-record low in the first quarter of 2020, as the beginning of the global coronavirus pandemic and ensuing lockdowns drove intense volatility across asset classes, steep equity market declines, and near record lows in investor risk tolerance, according to new data published by HFR.

New hedge funds launches totalled an estimated 84 in Q1 2020, the lowest quarterly estimate since the fourth quarter of 2008. Despite the exponential increase in volatility over the prior quarter, the launch total was only slightly lower than the estimated 89 launches in fourth quarter of 2019.

Meanwhile, fund liquidations surged to an estimated 305 in the first quarter of the year, the highest liquidation total since Q4 2015 and an increase of over 50 percent from the 198 liquidations from the prior quarter. HFR estimates that 738 funds liquidated in 2019, exceeding the 2018 total of 659 liquidations, but falling slightly below the 2017 total of 784 liquidations.

Average hedge fund management fees and incentive fees industry-wide each declined by 1 basis point from the prior quarter, falling to 1.38 percent and 16.40 percent in 1Q20, respectively, representing the lowest level for both fees since HFR began publishing these estimates.

For funds launched in Q1 2020, the average management was an estimated 1.14 percent, a decrease from the 2019 average of 1.22 percent. The average incentive fee for funds launched in the first quarter was an estimated 17.16 percent, also representing a decline from the prior year’s estimated 17.44 percent fee.

“New fund launches fell to historic lows in 1Q20 as the coronavirus pandemic drove steep losses across global financial markets, despite strong outperformance of the HFRI throughout the pandemic volatility,” stated Kenneth J. Heinz, President of HFR. “While the launch environment to begin 2020 has been extremely challenging as direct result of the drop in investor risk tolerance, institutional allocators which had reduced, eliminated, or failed to implement hedge funds or other risk-reducing alternative allocations were subjected to higher levels of portfolio volatility. As financial markets adjust to heightened levels of volatility over the intermediate term, we expect interest from forward-looking institutional investors to drive a more favorable launch environment through 2H20.”

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