US-Based Hedge Fund Manager Launch Numbers Plummet - January 2015

by Janet Hann

  • 26 Jan 2015
  • HF

The US leads the hedge fund marketplace; nearly 60% of funds globally (including funds of hedge funds) are managed by US-based firms according to Preqin’s Hedge Fund Analyst. Nevertheless, in the US in 2014, launches of fund management firms managing investment products in the hedge fund sector were down 42% on 2013 levels, with absolute numbers at their lowest levels since 2010.

The above chart shows the aggregate number of hedge fund managers and fund of hedge fund managers launched year-on-year since 2007. Activity was at its peak in 2012, with 262 new set-ups recorded, followed by 249 in 2013. In 2014, these numbers slumped to 144 single-manager and multi-manager firm launches, the lowest levels since 2010, when 139 new firms launched. As more data becomes available in 2015, we expect the final numbers to increase, though they are unlikely to reach the same heights recorded in the preceding years. The record numbers of launches seen in 2012 and 2013 could in part be explained by the implementation of the Volcker Rule in the US, which enforced banks to disband proprietary desks after the sub-prime mortgage crisis and financial bailouts in 2010. This series of events resulted in a significant number of spin-offs and new firms joining the hedge fund space, particularly attracted to the established hubs, which saw inflated numbers of launches during this period.

By US state, New York and California dominate as centres for hedge fund manager establishment, ranking first and second respectively by the proportion of launches each year. In 2014 in the US, the largest proportion of single-manager and multi-manager firms were launched in New York (47%), followed by California (15%) and Texas (10%). Despite this, between 2013 and 2014 New York registered a 39% decline in launch numbers, when only 67 firms set up shop. There was a similar pattern witnessed in California, with 22 new firms in 2014 compared to a peak of 36 in 2013. The slump experienced in these primary global financial centres is matched across the US. In 2014, set-ups were recorded in 18 different states in the US, the smallest amount since 2007 (16 states). This figure is significantly lower than 2012’s numbers, when launches were noted in 27 different states.

Single-manager and multi-manager hedge fund firms in the US have witnessed a significant decrease in the number of launches in 2014 from the previous two years. The sharp drop across the marketplace could suggest that the US hedge fund industry has entered a more mature stage of its lifecycle in 2014. Barriers to entry for new firms are now substantially higher. The increasing costs associated with meeting the stricter US regulatory framework and the additional costs of establishing a robust infrastructure to rival larger, more established institutions may be deterring new entrants. The competitive fundraising environment and the challenges faced by new firms as they seek to differentiate themselves in a crowded marketplace across the US looks  set to continue. All of these factors could suggest that these 2014 figures could set a new benchmark level for US hedge fund establishments.

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