Hedge fund managers are increasing fees in part to deal with higher interest rates and inflation.
Hedge funds launched in the first quarter (Q1) of 2023 saw management fees increase by 3 basis points on average from the previous quarter to 1.2%.
Incentive fees also increased by 89 basis points to an estimated average of 18.5%, according to Hedge Fund Research (HFR), a hedge fund data provider.
HFR said strong performance and capital inflows also drove the increases.
The overall increase (including funds already in existence at the start of the year) was 1 basis point for management fees (to an estimated 1.36%) and 18 basis points for incentive fees (to an estimated 16.17%.
However, these fees have been rising from the lowest levels since HFR first published figures in 2008.
New fund launches numbered 93 and were described as “steady” in Q1 and concurrent with a sharp rise in financial risks in banks, the HFR Market Microstructure Report said.
The HFRI Fund Weighted Composite Index increased 1.2% from the start of the year to May, led by equity hedge and relative value strategies. The equity hedge index increased 1.6%, driven by technology, AI and crypto, said HFR.
Kenneth J. Heinz, president of HFR, said the steady level of launches and a decrease in liquidations indicated that institutions were increasing their commitment to hedge funds as they seek to pare back high beta equity and illiquid private equity holding in favour of op “opportunistic, specialised, defensive portfolio positions”.
“Strong demand from institutional investors has been focused on defensive portfolio capital preservation, opportunistic exposures through volatile financial turmoil, increasing interest in multi-strategy inflation trading teams, and on technology, AI, and cryptocurrency exposures,” added Heinz. “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.”
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