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Fledgling Hedge Fund Managers Top First-Half Performance

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Emerging hedge fund managers led sector performance in the year ending with the second quarter of 2014, but continued to face challenges in raising capital, according to reports from HFR, a provider of hedge fund research, indexation and analysis.

Emerging managers with a track record of less than two years posted an average gain of 11.3% in the trailing 12 months ended June 30, compared with a gain of 9.1% for the HFRI Fund Weighted Composite.

“Emerging hedge fund managers continue to drive not only industry performance gains, but also strategic innovation across the hedge fund industry, with new funds launching to identify and monetise opportunities created by the shifting financial industry landscape, investor preferences and risk thresholds,” HFR president Kenneth Heinz said in a statement.

The top decile of HFRI constituents reported an average gain of +34.4% in the trailing 12 months through June 30, the second highest gain since 2010, behind only the 2013 return of 41.6%.

The bottom decile of HFRI performance posted an average decline of 12.7%, improving on the 18.9% loss for the 2013.

The report, released Wednesday, said the HFRI Diversity Index, comprising hedge funds owned by ethnic minorities and women, was up 11.1% over the same period.

Launches and Fees

A total of 285 new hedge funds rolled out in the second quarter of 2014, on par with both 289 from the first quarter and 288 from the second quarter of 2013.

Some 1,050 funds launched during the trailing 12 months to June 30, slightly below calendar year totals from the past three years, HFR said in the statement.

Hedge fund liquidations fell to 189 in the second quarter from 272 in the previous quarter, and totaled 979 funds for the trailing 12 months, the highest number of liquidations since 2009, following the financial crisis.

Hedge funds charged an average management fee of 1.52% in the second quarter, unchanged from the first quarter, and down two basis points from the 2013 second quarter, according to the report.

The average incentive fee charged by hedge funds in the second quarter declined three basis points to 17.96% from the prior quarter.

Fee data for the vintage of funds launched in the second quarter were mixed, with average management fee of 1.51%, in line the FY 2013 launch average of 1.52%. Incentive fees for new second quarter launches averaged 17.6%, the highest level since the third quarter of 2012.

Asset Raising

First half inflows totaled $56.9 billion, taking total hedge fund industry capital globally to more than $2.8 trillion, HFR reported in July.

In the second quarter, it said, investors allocated $21 billion to firms managing more than $5 billion, $9 billion to those managing between $1 billion and $5 billion, and only some $750 billion to firms managing less than $1 billion.

In the first half, it said, $52.2 billion of the total $56.9 billion in net inflows was allocated to firms with more than $1 billion under management.

“The capital raising environment for new hedge funds has improved, but it continues to be challenging for new and emerging managers to meet the demands of risk-conscious institutional investors,” Heinz said.

“However, in the present paradigm of low interest rates and low inflation, investors are likely to benefit from the unconstrained return generation capabilities and idiosyncratic innovations which new, emerging hedge fund strategies add to their portfolio exposures and allocations.”

Check out Will Calpers’ Hedge Fund Flight Spook Other Public Pensions? on ThinkAdvisor.


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