The Eurekahedge North American Hedge Fund Index was up 5.71% year-to-date as of August 2019, underperforming the underlying equity market as represented by the MSCI North America IMI, which gained 16.47% over the same period. The progress of the US-China trade negotiations combined with the exhibited accommodative stance of the Fed acted as tailwinds for North American hedge fund managers, resulting in Q1 return of 5.22% - the strongest since 2006. The positive developments of the US-China trade talks prompted President Trump to delay the scheduled tariff increase in March, which further uplifted the risk sentiment among investors during the first few months of the year. However, the robust rally in the equity market ended in May, following President Trump’s decision to increase the tariffs imposed on the Chinese imported goods resulting in the breakdown of their trade negotiation. Over the same month, President Trump blacklisted Huawei due to national security concerns. The tech-heavy NASDAQ and S&P 500 slumped 7.93% and 6.58% respectively in May. Going into the second half of the year, the Fed announced their first rate cut since 2007, pushing Wall Street’s three major indices to new all-time highs in July.
Figure 1: Industry growth over the years
The North American hedge fund industry AUM stood at US$1.57 trillion by the end of August, accounting for more than two-thirds of the global hedge fund industry, collectively managed by 5,477 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 255 hedge funds launching in 2018 and 107 launching as in 2019 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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