By any measure, the first six months of 2015 has been a wild ride. The uncertainties swirling around the potential “Grexit”, the on-again, off-again specter of an FOMC rate hike, quantitative easing by the European Central Bank, China’s comparatively sluggish economy and stagnant oil prices represent a few of the numberless variables hedge funds have confronted through the first-half of 2015. So how are they faring?
In the aggregate, hedge fund returns have been less than spectacular but, they remain in positive territory. Returns averaged 3.47% through June, 2015, representing a 20% increase in the gains achieved through June of last year. While overall hedge fund performance compares favorably to the S&P 500’s 1.09% year-to-date gain as of June 30th, 2015, it is important to recognize there are outliers at either end of the hedge fund returns spectrum.
Assets under Management
Hedge funds have experienced impressive growth, achieving $2.23 trillion in assets under management through May, 2015, which translate to $92 billion in net inflows.
Management and Performance Fees
As funds compete to attract new capital, management and performance fees have continued to decline from traditional two and twenty levels. Average management fees stood at 1.69% in 2014, while performance fees averaged 19.13%. Unsurprisingly, more than 38% of the hedge funds in a KPMG survey anticipated that management fees would see additional reductions in 2015.
Redemptions dropped to 3.15% in July, representing a 34% decrease from June’s 4.80% rate of redemption. The 3.15% figure is the lowest since January, 2015. It should be noted that both numbers fall within normal parameters for exit requests. In short, nothing extraordinary is occurring on this front, most notably in terms of public and private pension funds.
Hedge Fund Start-ups
2015 has seen a plethora of startup activity. Bloomberg reported at the end of the first quarter that 6 new hedge funds had launched with assets under management of at least $1 billion dollars each. Two-hundred sixty-four new funds were launched in the first quarter of 2015—second quarter numbers are unavailable at this time. However, if this rate persists through year-end, the number of new funds launched will be roughly on par with 2014.
Hedge Fund Closings
Although second quarter numbers are unavailable at this time, it can be reported that 217 funds have liquidated through the first quarter of 2015. Remarkably, if this rate holds, closures will also be on a par with 2014.
Given 6 years of an arguably artificially driven bull market in equities and bonds, it is something of a testament to the implacable nature of the industry to see net gains in hedge fund launches in 5 of the past 6 years.
Hedge Fund Sector Shifts
In the first half of 2015, we have also noted a significant shift from convertible arbitrage, distressed securities, emerging markets and event driven to the macro and multi-strategy sectors.
Equity long bias, equity long/short, fixed income, merger arbitrage, and equity market neutral sectors remain largely unchanged from 2014 levels.
Despite significant headwinds, the hedge fund industry continues to advance in net numbers and in assets under management. The industry has demonstrated its resilience and its innate ability to pivot as needed to meet contemporary challenges.