Key Trends in North American Hedge Funds (January 2022)

The Eurekahedge North American Hedge Fund Index was up 12.47% year-to-date as of November 2021, driven by the strong performance of the underlying equity market as represented by the MSCI North America IMI, which gained 19.87% over the same period.

Risk sentiment in late November was blunted due to the emergence of a new Omicron variant of COVID-19 which was found to be markedly more contagious than previous variants. Several recently published studies have also found that existing vaccines are less effective against Omicron, potentially derailing the global economic recovery if governments are forced to reimpose movement restrictions to stem the spread of the virus and prevent their healthcare systems from being overwhelmed. Compounding matters further, Federal Reserve Chairman Jerome Powell indicated that a swifter tapering of asset purchases was under consideration and that inflation should no longer be described as transitory. The resulting uncertainty led to a surge in market volatility, as seen in the 67.22% increase in the CBOE VIX and negatively impacted the performance of global equities. The DJIA and S&P500 posted declines of -3.73% and -0.83% in November respectively, bringing their year-to-date returns down to 12.67% and 21.59% respectively.

Figure 1: Industry growth in recent years

The North American hedge fund industry AUM stood at US$1.63 trillion by the end of November 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.

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