Hedge Fund Launches Hit 14-Year Low
Posted by Colin Lambert. Last updated: January 6, 2023
The increasingly difficult economic environment has seen the number of new hedge fund launches hit the lowest level since the fourth quarter of 2008, according to indexation firm HFR.
The estimated number of new hedge fund launches decreased to only 71 in the third quarter of 2022, a decline from the estimated 80 launches in Q2, representing the lowest launch rate since only 56 new funds launched in Q42008 at the depths of the global financial crisis.
It wasn’t all bad news, however, HFR says the number of hedge fund liquidations also declined over the prior quarter, as an estimated 145 funds closed their doors in Q3, down from 156 fund liquidations in Q2. In the trailing 12-month period ending Q3 2022, an estimated 449 total new hedge funds have launched, while an estimated 544 funds have liquidated.
Hedge fund fees declined slightly in Q3, with the average industry-wide management fee declining one basis point from the prior quarter to an estimated 1.35%, while the average incentive fee fell by 4 bps to 16.01%; both estimated fees represent their lowest levels since HFR began publishing these estimates in 2008.
For funds launched in Q3, average management fees increased by 3 bps from the prior quarter to an estimated 1.35%. Average incentive fees for funds launched in Q3 was estimated at 17.23%, representing a decline of nearly 70 bps from the prior quarter though remaining above the overall industry-wide average.
“Through an unprecedented, intense, and unpredictable environment, both macro funds and larger hedge funds across various strategies have driven industry-wide gains into the final month of 2022, topping steep equity market losses and posting YTD returns of +14.3 and +0.5% through November, respectively, for the HFRI 500 Macro Index and HFRI Asset Weighted Composite Index,” says Kenneth Heinz, president of HFR. “While institutional investors maintaining significant allocations to these have benefitted from this defensive, conservative positioning, these trends have also contributed to a challenging environment for new and recently launched funds, as overall risk tolerance has declined, leading to institutions focusing allocations on well-established funds which have successfully navigated much of the 2022 volatility.
“Similar risk off sentiment has also contributed to steady but historically low levels of fund liquidations, with institutions maintaining exposures through the current economic turmoil and tension between inflation and economic weakness heading into 2023,” he continues. “With significant uncertainty and wide disparity in economic outlooks into early 2023, it is likely that both launches and liquidations remain near historic levels, as institutions carefully evaluate opportunities and deliberatively position portfolios for volatility in 2023.”