Hedge Fund Launches Jump in H1 2023

New hedge fund launches were a feature of the first half of 2023, according to indexation and analysis firm HFR, with an estimated 133 funds launching in Q2, bringing the first half total to 226.

There was more good news for the industry with new launches exceeded liquidations for the first time since the first quarter of 2022. The launches were dominated by a large increase in fixed income based Relative Value Arbitrage, HFR says, which includes large credit multi-strategy funds, with an estimated 51 launching after 13 in Q1. Launches were driven by new RVA multi-strategy funds specifically positioned to navigate the volatile interest rate and inflation market cycles.

The number of fund liquidations was steady through mid-year as an estimated 109 funds closed in Q2, rising slightly from the prior quarter total of 102. In the trailing 12-month period ending Q2 2023, an estimated 393 funds launched, while an estimated 500 funds liquidated.

Hedge fund fees increased through mid-2023, driven not only by strong performance and capital inflows, but on capacity limitations at many large well-established firms. Increased operating costs associated with expanding inflation portfolio teams were also a factor. The average industry-wide management fee was unchanged from the prior quarter at 1.36%, while the average incentive fee increased by 2 bps to 16.19%. For funds launched in Q2, average management fees increased by 8 bps from the prior quarter to an estimated 1.29%.

“Hedge fund performance, dispersion, fee, and launch trends in recent months continue to be driven by market cycles of inflation and interest rates – a trend which is likely to accelerate into 2024,” observes Kenneth Heinz, president of HFR. “Through mid-year the focus of new launches and expansion of established funds was driven by demand to enhance and add inflation trading teams and exposures, with increased competition for these highly specialized teams driven by interest from multi-strategy funds looking to increase exposures and offerings in this area.

“Through mid-year the performance trend has shifted from the tailwind of AI technology beta and recovery from regional bank volatility to be intensely focused on inflation and interest rates as the primary driver,” he continues. “Fee increases have also been accompanied by limited capacity, increased required commitment periods, and increased rate of closing of the most desirable, highest performing strategies to new capital. Institutions seeking exposure to trends in specialised inflation and interest rate trading are likely to continue expanding their exposures to hedge funds, focusing new commitments to funds which have both demonstrated their robustness and increased their portfolio focus on these areas in recent months.”