New hedge fund launches slowed to conclude the volatile third quarter as total hedge fund industry capital posted a narrow gain to rise to a new record of $2.82trn, according to HFR.

New launches fell to 240 in 3Q14, the lowest quarter since one year ago in 3Q13, as reported in the latest HFR® Market Microstructure Industry Report, released today by HFR, the established global leader in the indexation, analysis and research of the global hedge fund industry.

Year to date, 814 new funds have launched while new launches in the trailing four quarters totaled 1,058, in line with the full-year total for 2013 (1,060), which was the lowest annual launch total since 2010.

Emerging hedge fund managers, defined as those with track records of less than 24 months, outperformed the broad-based HFRI Fund Weighted Composite Index in both 3Q14 and YTD.

Emerging Managers posted gains of +0.8 percent in 3Q14, while the HFRI Fund Weighted Composite Index posted a decline of -0.3 percent; YTD through 3Q, Emerging Managers have gained +4.7 percent, while the HFRI FWC gained +2.85 over the same time period.

Hedge fund liquidations increased over the prior quarter in 3Q14 with 200 hedge funds liquidating, though this number represents a YoY decline from the 3Q13 liquidation total of 222. In the trailing 12 months, 957 funds have liquidated, topping liquidations in each of the prior 4 years, and representing the highest total since 1,023 funds closed in 2009.

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Hedge fund performance dispersion narrowed in 3Q14, as the performance of both the top and bottom deciles of HFRI constituents converged. The top decile of all HFRI constituents gained +28.84 percent on average in the trailing 12 months, falling from a top decile gain of +41.6 percent in 2013. Similarly, losses at the bottom decile of performance moderated to -13.37 percent over the past year, an improvement of over 500 bps from the bottom decile decline of -18.93 percent from FY 2013.

Fund of Hedge Funds (FOF) performance dispersion also narrowed for the quarter, and approximately 90 percent of FOF’s posted gains in the last year. Despite this, the percentage of total hedge fund industry capital allocated from FOF remained at 24 percent ($672 billion), unchanged from the prior quarter, which was the lowest level since 2001.
The HFRI Fund of Hedge Funds Composite Index gained +0.3 percent in 3Q14, and has posted a gain of +3.14 percent YTD through November.

Average fees were little changed over the prior quarter, having declined over the past year. The average management fee industry-wide was 1.52 percent, representing a narrow YoY decline of -1 bps from 3Q13. The average incentive fee industry-wide increased by 5 bps over the prior quarter to 18.01 percent, but representing a decline of -26 bps over 3Q13.

The average management fee charged by new funds launched in 2014 increased to 1.55 percent, while the average incentive fee charged by new launches in 2014 increased to 17.52 percent; with both of these above 2013 vintage levels but below 2012 vintage levels.

"With global industry capital at a record level, competitive market pressures continue to shape the evolving landscape of the hedge fund industry, with new launches identifying areas of opportunity while funds which underperform remain vulnerable to investor capital redemptions," stated Kenneth J. Heinz, President of HFR.

"Volatility in Energy and Event Equities is expected to increase performance dispersion across the industry, creating opportunities for funds which have successfully navigated these trends. Recent performance gains, as well as increased investor risk tolerance, have been favorable toward emerging, small and mid-sized hedge funds, and is likely to attract investor capital to these innovative, nimble strategies into early 2015."