(March 13, 2012) — The difference between the best and worst performing hedge funds is narrowing, according to new research, but the number of new funds being launched is still approaching pre-crisis peaks.
In 2011, some 1,113 hedge funds were launched, including 270 in the fourth quarter, the highest calendar year total since 2007 when 1,197 funds were launched, Hedge Fund Research (HFR) announced this week.
Kenneth Heinz, President of HFR, said: “While some have suggested that increased regulation may deter new fund launches, many hedge funds are launching not only as a result of increasing investor risk tolerance, but also as a result of these regulatory changes to trading activities and risk oversight at financial institutions.”
However, performance may soon become an issue for investors as investment returns by the top performing hedge funds crept back towards the rest of the group – a trend that took hold in 2010.
Last year marked the lowest average performance for the top decile since HFR began tracking this metric in 2000 by a significant margin; the next lowest performance by the top HFRI decile was a gain of 39.2 in 2002, nearly twice the 2011 figure.
HFR said the worst performing decile of the broad based composite index, used to track the hedge fund universe’s performance, declined by 30.7% for 2011, while the top decile gained 19.5%, implying a top-bottom dispersion of just over 50%. This represents a decline from nearly 58% in 2010 and over 100% in both 2008 and 2009.
Heinz said: “Despite performance volatility and macroeconomic uncertainty in the second half of the year, investors maintained a strong commitment to hedge funds, and fund managers expanded the scope and breadth of strategies offered, making 2011 the strongest year for new launches since the global financial crisis.”
Management fees remained broadly flat, but incentive – or performance – fees continued their downwards trajectory, due to pressure from investors and relatively poorer returns.
Last month, HedgeFund Intelligence said there had been post-crisis high numbers of hedge fund launches in Asia in 2011.