The investment climate, which drives certain investor allocation preferences, hasn’t helped some hedge fund strategies, although that tends to be cyclical.
More impactful has been the capital-raising environment. Our data shows that asset-raising by hedge fund start-ups in 2022 was the lowest since the financial crisis. And the depressed activity continued in the first half of this year. In fact, the industry saw the biggest net outflow in 2022 since 2019, with only multi-strategy funds and CTA funds getting inflows. Those inflows we have seen have tended to go to larger managers.
Another factor has been the aggressive hiring of top investment talent by larger, mostly multi-manager hedge fund firms. Larger multi-strategy funds have provided an easier, faster and often more lucrative path for individuals or groups that might once have launched their own fund – something that has also become more costly to do.
There has certainly been a trend among some established managers to remodel themselves as multi-strategy firms and they have rebranded or relaunched their funds into this space. This is much harder for smaller start-ups to do, given the scale, operations and costs involved.
We’re still seeing a handful of larger launches coming to market, but these tend to have significant backing with top-pedigree founders. Among equity funds, healthcare and tech still dominate. The largest launch in 2022 was a healthcare-focused fund. Investor appetite and opportunities for distressed credit have driven a flurry of recent launches there, too. Commodities fund launches have also started to re-emerge after the field was decimated over the past decade. Niche strategies always have a place, and there have been some successes in energy transition related strategies.
We’ve seen the average size of new funds decline, certainly, mostly due to the fundraising climate.
There are fewer launches than pre-Covid coming out the gate with more than several hundred million dollars.
The number of billion dollar launches has also dropped off in recent years, but the second half of 2023 is set to yield a notable uptick, our data shows.
Proportionately, the Asia-Pacific region has seen the biggest decline in launch numbers. But 2023 has also given rise to perhaps the hottest geographical investment opportunity in Japan.
Dubai meanwhile has attracted a lot of interest as the newest hedge fund hub over the past year, with most established managers now having a presence there, and a number of new launches on the ground, too. In the US, a migration of many hedge funds to Miami has shaken up the map.
While the H1 data on new launches isn’t showing a reversal of the trend outlined, our forward looking indicators are more positive. Our data, based on With Intelligence reporting, shows that the number of new funds in development has risen significantly year-on-year over the past three quarters. And the pipeline for new funds in H2 2023 and 2024 looks much more promising.
The number of billion dollar launches is all set to rise in the latter half of 2023, and 2024 could see the biggest ever hedge fund launch.
A few larger allocators have developed emerging manager programs in recent years; some of the multi-strategy and bigger quant shops are increasing their external allocations to well pedigreed groups. Meanwhile some funds of hedge funds are also tweaking their business models to mirror multi-strats, which may provide some more start-up capital.