Key Takeaways
- • Global hedge fund launches reached their lowest level since 2000 in 2018, with only 561 new funds launched for the full year, according to HFR's Market Microstructure Report.
- • Fourth quarter 2018 saw only 111 new hedge fund launches, the lowest quarterly figure in recent years, reflecting continued market volatility and investor caution following December's equity market decline of 13.5 percent.
- • Fund liquidations declined to 659 closures in 2018, the lowest annual closure total since 2007, though Q4 liquidations spiked to 215—the highest level since Q2 2017—signaling a reversal of net industry growth.
- • The HFRI Asset Weighted Composite Index outperformed U.S. equities in 2018, returning -0.67 percent versus -4.4 percent for the S&P 500, with Large Macro and credit multi-strategy funds leading performance gains.
- • Management fees remained at historical lows across the industry, while incentive fee structures showed mixed results, reflecting ongoing pressure on hedge fund compensation models amid competitive fundraising conditions.
Summary
The global hedge fund industry contracted significantly in 2018, with new fund launches reaching their lowest annual level in nearly two decades. According to HFR's Market Microstructure Report, only 561 hedge funds launched across the full year 2018, marking the lowest launch total since 2000. The weakness accelerated in the fourth quarter, when market volatility intensified following a sharp 13.5 percent decline in U.S. equities; Q4 2018 recorded just 111 new launches, down 33 funds from the prior quarter and 79 fewer than Q4 2017.
The slowdown reflected broader market stress and investor sentiment deterioration during the volatile fourth quarter. Fourth quarter 2018 represented the second consecutive quarter in which fund liquidations exceeded launches, reversing a four-quarter trend of net industry growth. Liquidations surged in Q4 to 215 fund closures, the highest level since Q2 2017 when 222 funds closed. For the full year, however, total fund liquidations improved to 659 closures, down 125 from the 784 funds that liquidated in 2017 and representing the lowest annual closure total since an estimated 563 funds closed in 2007.
Despite the challenging fundraising environment and elevated market volatility, hedge funds delivered superior risk-adjusted returns relative to equities in 2018. The HFRI Asset Weighted Composite Index declined only 0.67 percent for the year, substantially outperforming the S&P 500's 4.4 percent decline. Large Macro and credit multi-strategy funds led hedge fund industry performance, with the HFRI Macro Index gaining 1.0 percent and the HFRI Relative Value Index advancing 0.73 percent. Concurrently, management fees remained at historical lows across the industry, while incentive fee structures showed mixed results as managers competed for capital in a demanding fundraising environment.
The slowdown reflected broader market stress and investor sentiment deterioration during the volatile fourth quarter. Fourth quarter 2018 represented the second consecutive quarter in which fund liquidations exceeded launches, reversing a four-quarter trend of net industry growth. Liquidations surged in Q4 to 215 fund closures, the highest level since Q2 2017 when 222 funds closed. For the full year, however, total fund liquidations improved to 659 closures, down 125 from the 784 funds that liquidated in 2017 and representing the lowest annual closure total since an estimated 563 funds closed in 2007.
Despite the challenging fundraising environment and elevated market volatility, hedge funds delivered superior risk-adjusted returns relative to equities in 2018. The HFRI Asset Weighted Composite Index declined only 0.67 percent for the year, substantially outperforming the S&P 500's 4.4 percent decline. Large Macro and credit multi-strategy funds led hedge fund industry performance, with the HFRI Macro Index gaining 1.0 percent and the HFRI Relative Value Index advancing 0.73 percent. Concurrently, management fees remained at historical lows across the industry, while incentive fee structures showed mixed results as managers competed for capital in a demanding fundraising environment.
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