Hedge fund launches spike in Q2, outpacing liquidations

There were an estimated 133 new hedge fund launches in the second quarter of 2023, up from 93 in first quarter, and an estimated 109 hedge funds that closed, marking the first time since first quarter of 2022 that launches exceeded liquidations, according to the latest HFR Market Microstructure Report issued on Oct. 4.

There were 226 total launches in the first half of 2023, down 14.7% from an estimated 265 launches in first half of 2022, according to the report from HFR, the research firm that tracks the global hedge fund industry.

HFR attributed the surge in launches to managers shifting their "strategic growth focus to aggressive expansion of inflation trading teams in multistrategy funds designed for and positioned to trade volatility driven by rising rates and generational inflation."

The new hedge fund launches were largely dominated by a significant increase in fixed income-based Relative Value Arbitrage (RVA), which includes large credit multistrategy funds. In the second quarter, there were 51 such new launches, up from only 13 in the first quarter.

HFR also said that launches were driven by new RVA multistrategy funds that were positioned to navigate the volatile interest rate and inflation market cycles that have dominated financial markets this year.

In the first quarter of 2023, there were an estimated 102 liquidations.

Over the trailing 12-month period through the end of the second quarter of 2023, an estimated 393 funds were launched, while an estimated 500 funds liquidated.

In addition, the HFRI Fund Weighted Composite Index gained 4.5% year-to-date through the end of August, led by equity hedge and event-driven strategies. These gains were "complemented by steady, recent gains in Relative Value Arbitrage" HFR noted.

Strategy gains were led by the HFRI Equity Hedge (Total) Index, which advanced 6.6% year-to-date through the end of August, while the HFRI Event-Driven (Total) Index complemented these gains in recent months, bringing its year-to-date performance to 5.2% through the end of August.

Separately, hedge fund fees increased through the end of June 2023, "driven not only by strong performance and capital inflows, but on capacity limitations at many large well-established firms, as well as increased operating costs associated with expanding inflation portfolio teams," HFR added.

The average industry-wide management fee was unchanged from the prior quarter at 1.36%, while the average incentive fee increased by two basis points to 16.19%.

For funds launched in the second quarter of 2023, average management fees increased by eight basis points from the prior quarter to an estimated 1.29%.