Emerging hedge fund managers are losing momentum as investors flock to larger and more established firms in a challenging market environment.
There were only 938 hedge fund launches last year, the lowest number since 2010, according to the latest report from SigTech, which provides quantitative services to asset managers and others. Volume was significantly down from the peak years of 2020 and 2021, when the number of new funds reached 2,377 and 2,504, respectively.
Long-short equity strategies dominated the new launches despite their poor performance last year. Globally, there were 181 new funds specializing in long-short in 2022, down from more than 500 funds in 2021. They were followed by cryptocurrency (121 new funds), multi-strategy (43 new funds), and macro (32 new funds).
“One possible explanation for this fall is found in the continued rise of large multi-strategy funds,” said Daniel Leveau, vice president of investor solutions at SigTech. He added that big funds like Bridgewater Associates, Man Group, and Renaissance enjoyed strong asset growth in 2022. “Based on numerous discussions with larger hedge funds, emerging managers, larger institutional investors, and their investment consultants, large funds are currently in high demand, whereas emerging managers are having difficulties attracting seed money,” he said.
Hedge fund launches around the world trended downward in 2022, according to SigTech’s data. In Hong Kong, only 16 new funds were established last year, down from over 100 funds in both 2020 and 2021. With 65 percent of hedge funds based in the U.S., the country saw the largest absolute drop in the number of fund launches last year.
The decline in up-and-coming hedge funds came at a time when the larger funds surprisingly outperformed the smaller ones amid mounting volatility. In many cases, managers of smaller funds are able to beat their larger counterparts because they are often nimbler and better positioned to take advantage of short-term opportunities.
“At the end of the day, most hedge fund managers care about research and portfolio management,” Leveau said. “They are not that interested in having too many client meetings, setting up the compliance structure, talking to the [regulators], hiring legal people, etc.” As a result, many experienced hedge fund managers chose to join the bigger names instead of launching their own funds as persistent inflation and tightening regulatory controls started to hurt operational alpha in 2022.
Leveau added that larger funds have also been viewed as “safer bets” by investors during periods of high market volatility. “Larger pension funds or endowments…rely on consultants to select funds,” he said. “If consultants recommend a well-known hedge fund manager that [turns out to be an underperformer], allocators won’t be blamed as much as if they chose to invest in a fund that nobody has heard of.”
“[Previously], the trend was to allocate to emerging managers because you want to find the new source [of alpha] before anybody else finds them,” Leveau said. “But in today’s market, there’s just less appetite for that.”
