The number of hedge fund launches has sunk to the lowest level in three years, while fund liquidations surged, hit by prospective US regulations, figures show.

The
number of global hedge fund launches in this year’s third quarter
hit a three-year low while liquidations reached the highest level since
the final quarter of 2012, as US regulators pushed ahead to approve the
long-delayed Volcker
Rule, according to the latest HFR Market
Microstructure Industry Report.

“Hedge fund launches declined in the third quarter, as both
managers, investors and financial institutions awaited the finalization and
regulatory approval of the Volcker Rule, which includes provisions restricting
proprietary trading by financial institutions, as well as restricting ownership
of hedge fund firms by financial institutions,” said Kenneth Heinz, president
of HFR.

“While the increased uncertainty has likely adversely
impacted hedge fund launches in the short-term, over the intermediate to long
term, the adoption of the rule is likely to result in increased hedge fund
launches, as experienced investment professionals set up new funds utilizing
their trading acumen,” Heinz said.

Hedge funds are likely to expand in scope to assume an
increasingly mainstream role in global capital markets, he added.  

The Volcker Rule, passed last week after a delay of three years, is named
after former Federal Reserve chairman Paul Volcker and aims to limit excessive
risk by preventing certain banking entities from betting on financial markets
for their own account. As well as prohibiting banking entities from engaging in
various short-term proprietary trades for their own gain, the final rules also
impose limits on their investments in, and other relationships with, hedge
funds or private equity funds.
Some media reports have also noted that the Volcker guidelines may make
it harder for some banks to provide certain private fund services to
their high net worth clients.

According to the research firm, hedge fund launch trends have not -
unlike what seems to be the case with the Volcker Rule - been
significantly impacted by the recent relaxation of hedge fund
marketing restrictions associated with the JOBS Act.

Numbers and performance

New fund launches totalled 231 for the third quarter of 2013,
down from 288 in the prior quarter and 275 a year ago. This represents the
lowest quarterly launch total since the final quarter of 2010 which saw 220
funds launches, HFR said.

Meanwhile, hedge fund liquidations rose to 222 in the third
quarter of 2013, up from the 190 logged in the previous quarter and the 211 recorded
a year ago. This is the highest quarterly total since 238 funds liquidated in
Q4 2012, the firm noted.

Continuing the trend of prior quarters, average hedge fund
management and incentive fees declined across the industry, with average
management fees falling 1 basis point to 1.53 per cent. Incentive fees declined
11 bps, to 18.2 per cent.

Funds launched in 2013 had an average management fee of 1.38
per cent, a decline of 24 bps from 2012 launches, while incentive fees for 2013
launches averaged 17.17 per cent, 57 bps lower than management fees charged by
2012 launches.

The top decile of HFRI constituents gained, on average,
+13.26 per cent in this year’s third quarter, while the bottom decile fell
-8.26 per cent. This, HFR said, created a decile dispersion of 21.5 per cent,
declining from the 22.8 per cent of the prior quarter.

By contrast, in the trailing 12 months, the top decile of
HFRI constituents gained +38 per cent on average, while the bottom decile
declined -19.2 per cent. This created a performance dispersion of 57.2 per cent,
exceeding the 50.2 and 48.6 per cent dispersion in each of the two previous
years.