Hedge Fund Numbers Rise Slightly in 2023
Posted by Colin Lambert. Last updated: April 2, 2024
Hedge fund launches just about outstripped liquidations in 2023, according to the latest HFR Market Microstructure Report, released by indexation and analysis firm HFR, with 438 new funds launching and 415 closing.
In Q4, new launches were the lowest since Q3 2023 at 85 funds, while an estimated 104 funds liquidated, slightly higher than Q3’s 100 funds. Launches were led by Multi-Strategy funds, with total launches in Relative Value Arbitrage totalling 147 for 2023 with over half of the launches in 4Q. HFR says Multi-Strategy funds continue to expand in strategic scope with trading team/pod-shop approaches, with these also increasing exposures to cryptocurrency and AI.
The new funds are launching into a challenging environment fee-wise, with HFR saying that fees concluded 2023 near historic lows, though shorter term trends show increases into year end, as managers positioned for growth and inflows in 2024. The average industry-wide management fee was unchanged from the prior quarter at an estimated 1.35%, while the average incentive fee saw a minimal quarterly increase of 3 bps to end the year at an estimated 16.04%.
For funds that launched in Q4, the average management fee was an estimated 1.5%, while the average incentive fee was an estimated 18.23%. Similarly, for funds that launched in calendar year 2023, the average management fee was an estimated 1.3%, while the average incentive fee was an estimated 17.98%.
“Hedge fund performance and growth trends shifted into year-end 2023, from being dominated by inflation and interest rates, to focusing on growth (both industry and improving broader economic) with an increased emphasis and impact on multi-strategy growth and exposures to cryptocurrency and AI technology,” says Kenneth Heinz, president of HFR. “While managers position for and build out trading teams to increase expertise and exposures in these areas, funds are also increasingly focused on geopolitical risk, encompassing not only military conflicts and the potential for expansion or new conflicts to emerge, but also on upcoming elections, potential for policy shifts and downstream economic impacts on supply chains, including the possibility of unexpected reversals or unpredictable dislocations which can occur as a result of geopolitical risk or shifts in the macroeconomic outlook.
“Institutions are likely to remain focused on both these opportunities and risks, increasing their exposures to hedge funds which have demonstrated their robustness and increased their portfolio focus on these areas in recent months,” he concludes.