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2018 Overview: Key Trends in North American Hedge Funds

Introduction

The Eurekahedge North American Hedge Fund Index was up 3.66% in January 2019, underperforming the region’s equity markets as represented by the MSCI North America IMI which gained 8.51% over the month. North American hedge fund managers ended 2018 down 2.97% as concerns over the US-China trade tension and fed rate hikes weighed on their returns. Going into 2019, fund managers kicked off the year by recording strong gains in January, thanks to the improving optimism over the US-China trade talks. On the other hand, the US Federal Reserve has adopted a patient, wait-and-see stance for their future rate decisions as a response to the muted inflation caused by the sharp decline of oil prices and the risk of global economic slowdown. The dovish tone exhibited by the Fed acted as a tailwind to the US equity markets and pushed the S&P 500 and DJIA by 7.69% and 7.17% higher respectively in January, recovering a sizeable portion of the steep losses they suffered in December last year.

Figure 1: Industry growth over the years
 

The North American hedge fund industry assets under management (AUM) stood at US$1.56 trillion by the end of January, accounting for just below two-thirds of the global hedge fund industry, collectively managed by 5,619 funds. Unlike the continuously growing industry AUM between 2009 and 2017, the hedge fund population in the region has stagnated over the past few years, barely changing since the end of 2015. Despite the strong investor inflows recorded, launch activities remain muted with 255 hedge funds launching in 2018 and 12 launching as in 2019 year-to-date, continuing the trend of decline in launches the industry has been seeing since 2014. The implementation of MiFID II in January 2018 might have put stronger pressure on hedge fund launch activities as the increased compliance cost and the stricter reporting requirements on traded instruments may act as barriers of entry against small funds.

Increasing competition from both within the hedge fund industry as well as from other investment vehicles, combined with the increasing regulation compliance costs made it relatively difficult for new hedge fund firms to launch and survive in the industry. On top of that, the relative underperformance of hedge funds in general over the past few years, compared to their pre-financial crisis performance also generated a strong pressure on the hedge fund fee structure, which could easily be observed on the downward trend of both performance and management fees.

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