Hedge Fund Focus

New launches rise, but remain off historical levels; Fees charged at Fund of Funds, Average Incentive Fees decline

Hedge fund liquidations fell by 50 percent in Q1 2009 from the record levels set in the prior quarter, according to data released today by Hedge Fund Research (HFR), a leading provider of hedge fund industry data. During the first quarter, 376 funds closed, compared to 778 fund closings in Q4 2008. This represented a quarterly attrition rate of 4.05 percent, the second highest quarterly attrition rate observed historically, exceeded only by the rate of 7.77 percent also set in the prior quarter. Since mid-year 2008, the total industry has declined by nearly 1,200 funds to just over 9,050 funds. Liquidations of funds of hedge funds experienced a significant increase in Q1 2009 and accounted for more than half of all closings, with nearly 200 funds-of-funds (FOF) shutting down, a single quarter record. This represented an annual FOF attrition rate of over eight percent, nearly double the previous record set in Q4 2008.

New fund launches accelerated during 1Q09, with approximately 150 funds entering the market, the highest rate of new introductions since Q2 2008.

Dispersion between the performance of the best and worst performing funds narrowed modestly in Q1 2009, but continued to be at historically wide levels. A spread of nearly 93 percent separated the top and bottom performance deciles over the trailing 12 month period, down from 103 percent for the calendar year 2008.

Fees remain under pressure:

The average management fee charged by hedge funds in Q1 2009 was 1.57 percent, while FOFs charged an average of 1.25 percent. Average management fees at Fund of Funds declined by three basis points since Q1 2008. The average incentive fee in Q1 2009 was 19.22 percent for hedge funds and 6.5 percent funds-of-funds, both reflecting declines in the last 12 months. During the last year, funds with lower management fees have outperformed funds with higher fees, although performance by fee bucket data is mixed over longer time periods.

Kenneth Heinz, President of HFR , said:

“Although risk aversion began to recede from historical levels in Q1 2009, the structural consolidation which has been ongoing for several quarters continued to transform the landscape of the industry.  We expect that the combination of the structural evolution and recent performance will continue to drive industry growth and change in 2009.”

About HFR:

Chicago-based HFR Group L.L.C., founded in 1993, is a global leader in the provision of hedge fund data, research, indexation and asset management. The HFR Group of companies includes Hedge Fund Research, Inc., and HFR Asset Management L.L.C. Hedge Fund Research produces the HFR Database, considered to be the definitive source of hedge fund performance and information. HFR also distributes the HFRI and HFRX Indices – the premier benchmarks for hedge fund industry performance.