Liquidations also increase to two-year high through European market turmoil

Opportunities for industry service providers continue to evolve

New hedge funds launches in 1Q12 increased to a level not reached since 2007 as hedge fund capital rose to a record level of $2.13 trillion, according to the latest Market Microstructure Industry Report, released today by HFR (Hedge Fund Research, Inc.) New fund launches totaled 304 in the first quarter, narrowly eclipsing the 298 launches in 1Q11 for the highest quarterly total since 4Q07. Hedge fund liquidations also increased during the first quarter, with 232 funds closing, the highest quarterly liquidation total since 240 funds closed in 1Q10. Fund of Hedge Funds (FOF) continued to experience a contraction in number of funds in the first quarter, with 64 FOF’s closing while 34 launched; 1Q12 was the 4th consecutive quarter of decline in number of FOF’s.

Hedge fund performance dispersion increased over the prior quarter, with the top decile of all hedge funds averaging a gain of over 20 percent in 1Q12, while the bottom decile of all funds declined by 28 percent on average. Dispersion over the trailing 12 months was essentially unchanged from the prior quarter. Hedge fund fees rose slightly in 1Q12 versus 1Q11, with average management fees of 1.63 percent and average incentive fees of 17.75 percent.

According to HFR’s research, service provider market share across prime broker, administrator, legal advisory and audit firms continued to fluctuate over the quarter, with J.P. Morgan and Goldman Sachs holding top PB shares with nearly half of all hedge fund assets globally. Administrators which experienced market share gains include BNY Mellon, GlobeOp and Citigroup.

“Innovative hedge funds are launching and finding opportunities as large financial institutions look to deemphasize trading activities as a result of anticipated regulation, realized trading losses and enhanced risk management requirements,” stated Kenneth J. Heinz, President of HFR. “Execution and risk control are integral components of successful hedge funds and these have been greatly enhanced by the evolution of transparency in recent years. These powerful trends will continue to support launches of new hedge funds designed to monetize inefficiencies in capital markets as financial institutions adapt to new reporting, risk and trading requirements.”