Hedge Fund Launches Rise as Financial Risks Increase

New hedge fund launches were on the rise in the last quarter of 2022 as the industry headed into 2023, rising from the lowest level since Q4 2008 in the prior quarter as investors positioned for 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.

The latest HFR Market Microstructure Report, released by indexation, analysis and research firm HFR, shows the estimated number of new hedge fund launches increased to 96 in Q422, an increase from the historic low of 71 launches in Q3. The number of hedge fund liquidations was steady over the prior quarter, as an estimated 144 funds closed their doors in Q4.

It represents an optimistic end to a tougher year for hedge funds, HFR says for the full year, an estimated 432 total new hedge funds launched, while an estimated 571 liquidated.

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%, while the average incentive fee fell by 2 bps to 15.99%; both estimated fees represent their lowest levels since HFR began publishing these estimates in 2008.

For funds launched in Q4, average management fees declined 17 bps from the prior quarter to an estimated 1.18%; for all funds launched in 2022, the estimated management fee remained steady over the prior year, increasing only 1 basis point to 1.34%. Average incentive fees for funds launched in Q4 was an estimated 17.68%, up from the prior quarter estimate of 17.23%. For all funds launched in 2022, the average incentive fee increased to 17.74% from the 2021 estimate of 16.57%.

“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,” says Kenneth Heinz, president of HFR. “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.

“Despite the increase, launches for the full year 2022 remain near historical lows, and increased sensitivity to financial risk by institutions as a result of bank failures may contribute to a continuing challenging launch environment to begin 2023, despite strong performance through Q123,” he continues. “With a cautious, yet opportunistic, eye towards the risks and reward continuum looking into 2023, institutions are likely to increase their exposures to hedge funds, both established and newly launched, which have demonstrated their robustness through several recent years of dislocations and intense volatility across the range of asset classes.”