Alt Investments

New Hedge Fund Launches Recover Off Lows; Clients Poise For Economic Woes

Editorial Staff 3 April 2023

New Hedge Fund Launches Recover Off Lows; Clients Poise For Economic Woes

The HFR report, among other details, said that investors were bracing for the increased chance of recession and rising financial risks. Some of the data pre-dated the Silicon Valley Bank and Credit Suisse dramas that broke in March.

New hedge fund launches were on the rise in the final three months of 2022, rising from the lowest level since the fourth quarter of 2008 – the time of the global financial crisis – figures show.

The estimated number of new hedge fund launches increased to 96 in Q4 2022, an increase from the historic low of 71 launches in the third quarter of that year, according to Hedge Fund Research

The number of hedge fund liquidations was steady over the prior quarter, as an estimated 144 funds closed in Q4 2022. For the full year 2022, an estimated 432 total new hedge funds were launched, while an estimated 571 funds were liquidated, the Chicago-based research firm said.

Investors positioned for the increased likelihood of economic recession and prior to a sharp rise in financial risks in banks associated with the sharp increase in interest rates over the past year, it said. 

Separately, the firm’s HFRI 400 (US) Fund Weighted Composite Index gained by 2.0 per cent from the start of this year, led by event-driven and equity hedge strategies. (Event-driven strategies make money from events such as merger and acquisitions that cause price movements that funds can exploit – hence the name. Equity hedge, sometimes known as long/short, seek to give controlled exposure to markets and protect downside risk.)

Hedge fund fees remained steady and mixed to conclude 2022, with the average industry-wide management fee unchanged from the prior quarter at an estimated 1.35 per cent, while the average incentive fee fell by 2 bps to 15.99 per cent; both estimated fees represent their lowest levels since HFR began publishing these estimates in 2008.

Fees have been a sore point at times. In 2017 – a period when equities rose on the back of ultra-low interest rates – famed US investor Warren Buffett said at the time that managers hadn’t justified fees gleaned over almost a decade of “dismal” returns. On the flipside, funds can eke out returns while broader long-only equity investors lose money – living up to their “hedge” name.

For funds launched in Q4 2022, average management fees declined 17 bps from the prior quarter to an estimated 1.18 per cent; for all funds launched in 2022, the estimated management fee remained steady over the prior year, increasing only 1 basis point to 1.34 per cent, the HFR report said.

“Hedge funds navigated an acceleration of the volatility to conclude 2022, with intense risk-on and risk-off market cycles punctuating a year dominated by increased risk of economic recession as a result of a sharp increase in interest rates necessary to tame generational inflation,” Kenneth Heinz, president of HFR said. “The increase in launches and steady level of liquidations indicates institutions are increasing commitment to hedge funds, with institutions looking to pare back high beta equity and illiquid private equity holdings in favour of opportunistic, specialised, defensive portfolio positions.”

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