Highlights
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Hedge Fund launches have remained steady in recent years, but the number of fund closures increased nearly 20% last year compared to 2019 (from 66 closures in 2019 to 79 in 2020).
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On average, funds that closed in 2020 had more assets under management and longer track records.
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Despite closures outpacing launches in 2020, data along with investor discussions indicate that allocators’ appetite for hedge funds is increasing as we head into 2021.
Overview
2020 was a challenging year on many fronts, and the hedge fund industry was not immune. On the flip side, for those who successfully navigated 2020, it was also a year of increased investment opportunities with the significant re-emergence of volatility and dispersion – this comes through in launch and performance data for the year. In our annual review of launches and liquidations, we tracked the same number of institutional fund launches in 2020 as we did in 2019 (62 launches in both years). However, during this the same period, fund closures increased from 66 in 2019 to 79 in 2020. Over the past two years, marked by drastically different events and market dynamics, Equity Sector and Equity Diversified strategies constituted the top two buckets for both closures and launches.
Hedge Fund Launches
Unsurprisingly, we see a relationship between performance and fund launches. In 2020, Equity Sector topped both lists, accounting for 47% of the year’s total launches, and returning 24.7% for the year. Equity Sector clocked 2019’s highest returns as well, finishing the year at 15.6% to Equity Diversified’s 12.7%. While Equity Diversified launches exceeded Equity Sector in 2019, that trend reversed in 2020.
Assets Under Management
Half of the funds that launched in 2020 did so with less than $100M in assets under management. However, the other half launched with $100M+ in AUM. Without in-person diligence as an option for most of the year, some investors proceeded to allocate based on research conducted in-person prior to March of 2020. Others learned to adapt, increasingly employing systematic research techniques based on prior track record analyses and relative peer performance, resulting in allocations to experienced managers with whom they may or may not have met previously.
Hedge Fund Closures
As mentioned above, while strategy outperformance tends to coincide with an increase in fund launches, the converse is true for underperformance and closures. While Equity Diversified was far from the bottom-performing strategy in 2019, these equity managers may compete with sector-focused funds for allocations. Given they lagged Equity Sector performance-wise in 2019 and 2020, it’s not surprising that they “lead” the field in closures in 2020.
Track Record
The average length of track record for funds that shuttered in 2019 was just over seven years, whereas the average track record length of funds that closed in 2020 was 8.75 years. The shortest track record was 3 months, the median track record length was 7.4 years and the longest was just shy of 29 years.
According to our historical data, funds that closed in 2019 had an average AUM of approximately $580 million and a median AUM of approximately $420 million. In 2020, the average AUM of funds that closed was higher, coming in at approximately $650 million, with a median of $250 million.
2021
We believe investor appetite for hedge funds has grown during 2020, as 74% of managers ended 2020 in positive territory, with our Composite up 11.7% for the year. Additionally, we have heard two important and consistent themes from the institutional investors who comprise our client base: (1) they are actively doing work in the space and (2) they have additional capital they intend to allocate to it during the next 12 months.