Key Trends in North American Hedge Funds (August 2021)

The Eurekahedge North American Hedge Fund Index was up 11.34% year-to-date as of June 2021, driven by the strong performance of the underlying equity market as represented by the MSCI North America Index AC, which gained 14.68% over the same period. Covid-related mobility restrictions in most developed markets continued to be progressively relaxed as vaccination rates rise, providing support to the reopening of their economies. The swift rebound in economic activity led to higher inflation in some countries, most notably in the United States where in June, the US consumer price index increased by 5.4% year-on-year – the sharpest 12-month inflation spike since August 2008. This has led to concerns that the continued higher inflation would compel the Federal Reserve to act earlier than expected to pull back on its ultra-low interest rate policies and potentially derail the economic recovery. Nevertheless, the Federal Reserve regards the surge in inflation as a temporary phenomenon and will consider rate hikes only after the economy has made substantial progress towards a strong recovery. The S&P 500 and NASDAQ closed the first half of 2021 at or near record highs, rising by 2.22% and 5.49% in June respectively, supported by the rebound in economic activity as more people return to work. As of June 2021 year-to-date, the S&P 500 and NASDAQ have returned 14.41% and 12.54% respectively.

Figure 1: Industry growth over the years

The North American hedge fund industry AUM stood at US$1.62 trillion by the end of June 2021, collectively managed by 5,311 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 until the end of 2019 and declined from 2020 onwards. Launch activities remain muted with 333 hedge funds launching in 2019 and 159 launching in 2020, 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 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 from the downward trend of both performance and management fees.

The full article is available in The Eurekahedge Report accessible to paying subscribers only.

Subscribers may continue to login as usual to download the full report and non-subscribers may email to enquire on how to obtain the full research report.