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2018 Key Trends in North American Hedge Funds


North American hedge funds were up 3.39% as of August 2018 year-to-date, outperforming their peers focusing on other regions, owing to the robust economy of the United States which was supported by the Trump administration’s tax cut policy. The strong economy led the Federal Reserve to tighten their monetary policy by gradually increasing their short-term interest rates to contain the low unemployment rate, stabilise inflation, and avoid overheating the economy. The rate hikes made the US bond market attractive to investors due to the rising bond yields, causing a massive equity market selloff in early February this year. The North American equity markets have since recovered, boosted by strong corporate earnings season, which saw more than 80% of the large-cap companies comprising the S&P 500 index beating Q2 analyst estimates.

Figure 1a: Industry growth over the years

The North American hedge fund industry AUM currently stands at US$1.65 trillion, accounting for just over two-thirds of the global hedge fund industry, collectively managed by 5,667 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 181 launching as of August 2018 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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