News & Events

Key Trends in North American Hedge Funds (May 2020)

The Eurekahedge North American Hedge Fund Index was down 9.61% year-to-date as of March 2020, outperforming the underlying equity market as represented by the MSCI North America IMI, which lost 21.40% over the same period. The severity of the COVID-19 outbreak outside Mainland China has forced government authorities to implement lockdown and social distancing measures, resulting in a massive sell-off in the global equity market. In 2019, North American hedge funds ended the year returning 9.11% - their strongest annual performance since 2013, supported by the robust performance of risk assets. The US and China agreed on a phase one trade deal in October, boosting the performance of global equities in the latter part of the year. The deal was officially signed in January 2020. Market risk sentiment completely shifted in early 2020 following the outbreak of COVID-19, which posed a significant risk to the global economic outlook. In response, the US Congress approved a historic US$2 trillion economic stimulus package, while the Federal Reserve concurrently cut their policy rates to zero on top of restarting their quantitative easing program to support the economy. The US equity benchmarks suffered massive declines in February and March, which resulted in their worst quarterly performances since the 2008 global financial crisis. The DJIA and S&P 500 were down 23.20% and 20.00% respectively over the first quarter of 2020.

Figure 1: Industry growth over the years

The North American hedge fund industry AUM stood at US$1.46 trillion by the end of March 2020, accounting for more than two-thirds of the global hedge fund industry, collectively managed by 5,536 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 333 hedge funds launching in 2019 and 30 launching as in 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 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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