While overall hedge-fund performance continues to lag the broader market, the news continues to improve for the beleaguered industry.
According to Hedge Fund Research, new funds outnumbered fund liquidations in the third quarter, snapping a lengthy streak where the industry shrank in terms of the number of funds. This was the first quarter in which launches exceeded closures since the second quarter of 2015.
There were 176 launches over the course of the quarter, up from 170 in the year-ago period. On the closure side, 137 funds were liquidated, compared with the 252 funds that shut down in the third quarter of 2016. The industry has struggled for years amid a broad shift to passive vehicles, which are both significantly cheaper than hedge funds and have long boasted superior performance amid the multiyear bull market, a trend that persists.
“2017 has been a recovery year for the hedge-fund industry from 2016,” Kenneth Heinz, president of HFR, said in a press release, adding that “this powerful industry evolution and growth trajectory is very likely to accelerate in” the first half of 2018.
More than 1,000 hedge funds shut down last year, the most in any year since 2008, during the worst of the financial crisis. That occurred despite a generally positive market backdrop; the S&P 500 SPX, -0.05% rose 9.5% over 2016.
Aggregate hedge-fund performance continues to lag. The HFRI Fund Weighted Composite Index has gained 7.6% thus far this year, through November, less than half the rise of the S&P 500 over the same period. In addition, while market-tracking exchange-traded funds can be purchased for as little as 0.04% of assets—or $4 for every $10,000 invested—hedge-fund fees remain significantly higher, which further erodes an investor’s profit. The average management fee was 1.45% of assets in the quarter, while the incentive fee was 17.1%.
Hedge-fund assets hit a record $3.15 trillion in the third quarter, compared with $3.02 trillion at the end of 2016. While the industry benefitted from net year-to-date inflows of $2.9 billion—compared with outflows of $70.1 billion over 2016—most of the asset growth came from price appreciation in the underlying assets.
There was approximately $1.7 billion in third-quarter inflows, the second straight quarter of positive flows into the space. The inflows in the second quarter represented the first quarter of net inflows since the third quarter of 2015.
A bright spot for the industry came with hedge funds related to bitcoin and other cryptocurrencies. Last week, Hedge Fund Research unfurled a pair of indexes tracking the performance of funds dedicated to cryptocurrencies and blockchain, the decentralized ledger technology that is the underpinning to bitcoin BTCUSD, -12.52% and other digital currencies.
A new index, the HFR Blockchain Composite Index, tracks funds that invest in blockchain technology and cryptocurrencies. The other, the HFR Cryptocurrency Index, tracks all funds that invest and trade in various cryptocurrencies directly, HFR said Wednesday.
The blockchain index is up more than 1,500% in 2017 through November, while the cryptocurrency gauge has surged by more than 1,600%.