Research

2017 Overview: Key Trend in North American Hedge Funds

Introduction

The North American hedge fund industry grew by US$136.4 billion over 2017, owing to the strong performance of hedge fund managers, as indicated by the 8.60% gain posted by the Eurekahedge North American Hedge Fund Index over the year, which is its strongest performance since 2013. Thanks to the strong equity market performance around the globe, hedge funds with high long exposure to equities enjoyed the benefits of the record breaking equity market rallies. Despite falling behind their peers from Latin America and Asia, North American hedge funds kicked off 2018 with a decent performance, gaining 1.54% in January. Long/short equities funds topped the chart among strategic mandates with their 2.04% gain over the first month of 2018.

Figure 1a: Industry growth over the years
  North American hedge fund industry growth over the years

Currently, the North American hedge fund industry assets under management (AUM) stands at US$1.66 trillion, accounting for two-thirds of the global hedge fund industry AUM, collectively managed by 5,662 hedge funds. Unlike the continuously growing industry AUM, 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 375 hedge funds launching over 2017 and four launching in January 2018, continuing the trend of decline in launches the industry has been seeing since 2014. The implementation of MiFID II in January 2018 may 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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