New hedge fund launches surged through mid-2023 as managers shifted the strategic growth focus to aggressive expansion of inflation trading teams in multi-strategy funds designed for and positioned to trade volatility driven by rising rates and generational inflation.
That’s according to the latest HFR Market Microstructure Report, which reveals that the estimated number of launches reached 133 in the second quarter of the year, bringing the total for H1 2023 to 226.
New hedge fund launches were dominated by a large increase in fixed income based relative value arbitrage (RVA), which includes large credit multi-strategy funds, with the Q2 launch total rising to an estimated 51 from the prior quarter total of only 13. Launches were driven by new RVA multi-strategy funds specifically positioned to navigate the volatile interest rate and inflation market cycles which have dominated financial markets as inflation has risen to generational records and the US Federal Reserve has increased interest rates over 500 basis points.
New hedge fund launches exceeded liquidations for the first time since the first quarter of 2022.
The number of hedge fund liquidations was steady through mid-year as an estimated 109 funds closed in Q2 2023, rising slightly from the prior quarter total of 102. In the trailing twelve-month period ending Q2 2023, an estimated 393 funds launched, while an estimated 500 funds liquidated.
The HFRI Fund Weighted Composite Index® (FWC) advanced +4.5% YTD through August, led by equity hedge and event driven strategies, with gains complemented by steady, recent gains in relative value arbitrage. Strategy gains were led by the HFRI Equity Hedge (Total) Index which has advanced +6.6% YTD through August, while the HFRI Event Driven (Total)  Index complemented these gains in recent month, bringing YTD performance to +5.2% through August.
The performance dispersion of the HFRI Fund Weighted Composite Index® (FWC) meanwhile, decreased slightly from the prior quarter, as the top decile of index constituents returned an average of +14.6% in Q2 2023, while the bottom decile declined by an average of -8.2%, representing a top/bottom decile dispersion of 22.8%, compared to a top/bottom dispersion of 23.69% in 1Q23. In the trailing twelve-month period ending Q2 2023, the top decile of FWC constituents returned an average of +32.2%, while the bottom decile declined by an average of -16.6%, representing a top/bottom decile dispersion of 48.8%.
Hedge fund fees increased through mid- 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. The average industry-wide management fee was unchanged from the prior quarter at 1.36%, while the average incentive fee increased by 2 bps to 16.19%. For funds launched in 2Q23, average management fees increased by 8 bps from the prior quarter to an estimated 1.29%.
