In 4Q 2023, hedge fund launches declined as managers braced for falling inflation and an improving economic outlook, despite escalating geopolitical risks.
Only 85 new hedge funds were launched in 4Q23, according to hedge fund analyst HFR’s data, marking the lowest quarterly figure since Q3 2022. However, the total number of new launches for 2023 reached 438 funds.
Conversely, hedge fund liquidations remained steady, with an estimated 104 closures in Q4 2023 and 415 funds liquidated throughout the year. Multi-Strategy funds led the launch activity, particularly in Relative Value Arbitrage, accounting for over half of the new launches in the fourth quarter.
Hedge fund capital hits record high amid shifting risks
Despite these trends, the HFRI Fund Weighted Composite Index® (FWC) showed positive performance, gaining 8.1% in 2023 and adding 2.4% in the first two months of 2024. Equity Hedge strategies led the performance in YTD 2024, with the HFRI Equity Hedge (Total) Index advancing 3.0% through February.
Macro hedge funds also started the year on a strong note, with quantitative, trend-following CTA strategies posting gains of 5.4% over the first two months of 2024.
However, performance dispersion within the HFRI FWC increased in 4Q23, indicating varying returns among hedge fund constituents. The top decile of index constituents returned an average of 20.5%, while the bottom decile declined by an average of -9.0%.
Furthermore, hedge fund fees remained near historic lows in 2023, with average management fees unchanged and average incentive fees seeing minimal increases. However, fees for newly launched funds in 4Q23 experienced a slight rise, reflecting managers’ anticipation of growth and inflows in 2024.
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“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,” stated Kenneth J. Heinz, president of HFR.
Managers are bolstering trading teams to enhance expertise and exposures, alongside a heightened focus on geopolitical risks, he explained. This encompasses factors like military conflicts, elections, policy shifts, and economic impacts on supply chains.
According to Heinz, institutions are expected to maintain attention to these dynamics, favouring hedge funds with demonstrated resilience and portfolio alignment with these factors.
