Evening Brief – 04.12.24
Launches, Strategies and Fees
There were 438 hedge fund launches in 2023, but the number of liquidations was close behind at 415, according to newly released HFR data.
In 2023, hedge fund managers saw a decrease of more than $9 billion in assets, which is significantly lower than the $55 billion reported in 2022. The total value of assets increased by $112 billion, reaching $4.1 trillion. The number of hedge funds, as measured by HFR, stands at around 9,000, about the same level it has maintained since 2020.
Managers finished 2023 expecting lower inflation and a stronger economic outlook, according to HFR, despite geopolitical risk reaching historic highs. The HFRI Fund Weighted Composite gained 8.1% in 2023 and is up 2.4% in the first two months of 2024, according to the firm.
“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,” said HFR President Kenneth Heinz.
The expected number of new hedge fund launches in the fourth quarter of 2023 dropped to 85, the lowest quarterly total since the second half of 2022. Closures totaled 104 funds, a minor rise over the previous quarter’s 100 liquidations.
Fund Strategies
Meanwhile, multi-strategy fund launches led the way in 2023, as they broadened their strategic reach with trading team techniques, as well as boosting their exposure to cryptocurrency and AI.
Despite negative net asset flows of $7.3 billion in the fourth quarter, equity hedge funds showed the top performance in 2023, returning more than 11.4%. Equity strategies have led the pack so far in 2024 as well, with 3% gains through February. Sub-strategies including healthcare and quantitative directional hedge funds have also had significant profits in 2024.
Macro hedge funds, which suffered net withdrawals of more than $12 billion in the fourth quarter, started the year strong, with quantitative and trend-following CTAs up 5.4% in the first two months.
Eye on Fees
Hedge fund fees ended 2023 near historic lows, according to HFR, however shorter-term trends suggested increases toward the end of the year as managers prepared for growth and inflows in 2024.
The average industrywide management fee remained steady from the previous quarter, at an estimated 1.35%, while the average incentive fee increased by only 3 basis points in the fourth quarter, to an estimated 16.04%.
For funds that launched in the fourth quarter of 2023, the average management fee grew by a projected 1.5%, while the average incentive fee jumped by 18.23%. Similarly, for funds established in 2023, the average management fee decreased an anticipated four basis points to 1.3%, while the average incentive fee increased by an estimated 24 basis points to approximately 18%.