By Lydia Tomkiw
Liquidations look set to outpace hedge fund launches for the third year in a row, and a pronounced shift is underway, as newly started funds are putting an increasing focus on artificial intelligence (AI) and quantitative techniques, industry watchers say.
This year’s results nevertheless have a less dire tone, with the 2016 headwinds of massive outflows and performance struggles having eased up.
While 2016 hit a low point, with liquidations significantly outpacing launches for the first time since the financial crisis era of 2007-2009, 2017 brought a better pace, says Ted Dougherty, head of Deloitte’s U.S. hedge fund practice and national tax leader for hedge funds.
“2017 was a pretty big year in the hedge fund space. We continue to see a fair amount of liquidations resulting from several years of underperformance and performance weariness,” he says. “But on the positive side, the launch activity relative to 2016 was significant and exciting.”
Closures still are likely to overtake launches for the third year in a row, with Eurekahedge counting 555 hedge fund closures year-to-date in 2017 and 489 new funds. Hedge Fund Research had counted a similar imbalance of 369 launches to 481 liquidations through the second quarter of 2017. Blue Ridge Capital, Eton Park Capital Management, Hutchin Hill Capital, and Kase Capital Management were among the noted closures this year.
The hedge fund of funds sector also continued to see closures and continued consolidation. There have been 718 launches and 735 liquidations year-to-date, according to Preqin.
Hedge fund liquidations in 2016 were largely driven by underperformance, says David Frank, CEO and managing partner of hedge fund marketer Stonehaven. Hedge fund performance has rebounded in 2017, as reported.
“In 2017 liquidations were mostly likely the result of managers failing to gain momentum against the backdrop of lower overall demand for hedge funds,” he said in an email to FundFire. “Nevertheless, there are many hedge funds still finding success raising capital.”
There was more buzz over launches this year, particularly for funds in the AI and cryptocurrency space, says Robert Van Grover, a partner and co-head of Seward & Kissel’s investment management group.
“There are always people trying to start, but launches do usually take longer and there is a need for an anchor investor,” he says.
While fewer new funds were seeded with institutional size capital this year, many larger launches did have anchor investors providing enough capital to break even, says Frank Napolitani, director on the financial services team at EisnerAmper. “The anchor tenants we saw this year were more family office oriented,” he says, adding that over 80% of launches on-boarded this year have had some sort of equity strategy.
For funds looking to launch in 2018, AI and quantitative techniques will be a big part of the picture. A recent Deloitte report estimates that 70% of new launches will likely have investment processes supported by computer modeling, including AI and machine learning, compared with only 47% in 2015.
“It’s a combo of increased advances and cheapness of computing power on one hand and on the other hand the sheer volume of data that is available in the public domain,” Dougherty says, adding that fundamental hedge funds are increasingly adding computing power to supplement their research as well. “I don’t think it can be ignored at this point – it has become too important to the overall process.”
Cryptocurrency funds saw significant launch activity in 2017, with funds now numbering at over 100, as reported. While there is institutional investor interest, many are holding back as they review issues of valuation and custody, says Steven Nadel, a partner in Seward & Kissel’s investment management group.
“There will be some significant level of regulation on the cryptocurrency space coming out,” he says.
The first quarter of 2018 should yield a steady stream of launches, but the economic environment will have a lot to with which strategies managers will bring out later in the year, Frank says.
“If this market continues as is, you will continue to see equity fund launches,” he says. “If it turns, you’ll see more macro funds launching and distressed funds launching too.”