Key Trends in North American Hedge Funds (January 2021)

The Eurekahedge North American Hedge Fund Index was up 10.53% year-to-date as of November 2020, driven by the strong performance of the underlying equity market as represented by the MSCI North America IMI, which gained 13.32% over the same period. Supported by the strong performance of the equity market in the region, North American hedge funds quickly recovered from their 10.14% deficit in the first quarter which was their worst quarterly performance since inception due to the spread of the COVID-19 outbreak in the region.  The exhibited accommodative economic policies of the US administrations and Federal Reserve resulted in the strong rally of the risk-assets in the region, which contributed to the fund managers' performances. The US equity benchmark recorded a strong rally, particularly the NASDAQ Composite gained 35.96% compared to the 12.10% return of the S&P 500. Tech-companies strongly benefitted from the ongoing pandemic as seen from the strong performance of the FAANG group, with AAPL gaining 62.17% as of November 2020. In the same vein, North American hedge funds also recorded their best eight-month performance as they returned 22.82% since-end March.

Figure 1: Industry growth in recent years

The North American hedge fund industry AUM stood at US$1.47 trillion by the end of November 2020, accounting for more than two-thirds of the global hedge fund industry, collectively managed by 5,421 funds. Unlike the continuously growing industry assets under management (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. Launch activities remain muted with 333 hedge funds launching in 2019 and 125 launching as of 2020 year-to-date, continuing the trend of decline in launches the industry has been seeing since 2016.

The implementation of MiFID II in January 2018 might have put stronger pressure on hedge fund launch activities as the increased compliance cost and 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 from the downward trend of both performance and management fees.

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