“Institutions are likely to remain focused on specialized inflation and interest rate trading, and expanding their exposures to hedge funds which have both demonstrated their robustness and increased their portfolio focus on these areas in recent months.”
In the fourth quarter, new hedge fund launches and liquidations maintained stability as managers anticipated the pinnacle of generational inflation and the conclusion of aggressive interest rate increases dominating the past two years, said an HFR paper.
According to the HFR Market Microstructure Report, 127 new hedge funds launched in 3Q23, a marginal decline from the preceding quarter, totaling 353 launches in 2023.
Liquidations were also steady, with an estimated 100 fund closures in 3Q23, a slight decrease from the previous quarter. Over the trailing twelve-month period ending 3Q23, 449 funds were launched, while 455 funds liquidated.
Hedge fund average management fee decreased by 1bp to 1.35%
The HFRI Fund Weighted Composite Index (FWC) exhibited a YTD gain of +4.8 percent through November. Equity Hedge and Event-Driven strategies spearheaded this advancement, accompanied by consistent gains in Relative Value Arbitrage. The HFRI Equity Hedge (Total) Index rose +6.6 percent YTD, the HFRI Event-Driven (Total) Index gained +6.0 percent YTD, and the HFRI Relative Value (Total) Index added +5.9 percent YTD through November.
Performance dispersion in the HFRI Fund Weighted Composite Index (FWC) slightly decreased in 3Q23. The top decile returned an average of +11.1 percent, while the bottom decile declined by -10.0 percent, resulting in a top/bottom decile dispersion of 21.1 percent.
Hedge fund fees experienced a decline in 3Q23, aligning with managers’ preparations for growth and inflows in 2024. The industry-wide management fee decreased by 1 basis point to 1.35 percent, and the average incentive fee decreased by 18 bps to 16.01 percent. For funds launched in 3Q23, the estimated average management fee was 1.22 percent, with an estimated average incentive fee of 17.82 percent.
Hedge funds still prepared for unexpected reversals in geopolitics and macro outlook
Kenneth J. Heinz, President of HFR, said: “Hedge fund performance and growth trends continue to be dominated by inflation and interest rates with these having experienced a major inflection point in late 2023 as inflation and interest rates posted sharp declines into year-end, easing and reversing the primary source of volatility in financial markets for the past two years.
“Strong performance through this intense volatility is likely to drive performance and capital flows through 1H24 with leadership from multi-strategy funds which have successfully navigated this market cycle. While managers and investors alike are positioning for this welcome decline in rates, funds also continue to position for 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 specialized inflation and interest rate trading, and expanding their exposures to hedge funds which have both demonstrated their robustness and increased their portfolio focus on these areas in recent months.”
