Hedge Fund Launches Soar in Q1 2024 as Industry Assets Hit Record High Amid Growing Geopolitical Risks

Hedge fund launches have seen a sharp increase, while liquidations have remained steady at the start of 2024, with industry assets reaching a record-breaking $4.3 trillion. According to the latest HFR Market Microstructure Report, fund managers are positioning themselves to capitalise on the growing geopolitical risks in the year ahead.

In Q1 2024, the number of new hedge fund launches surged to 146, marking a 70% increase from the previous quarter and the highest number since Q1 2022. This uptick follows a solid year in 2023, which saw an estimated 438 new funds launched. On the other hand, hedge fund liquidations held steady, with 106 funds closing in the first quarter, in line with Q4 2023's 104 liquidations. For the entirety of 2023, approximately 415 funds liquidated, the lowest since 2004.

Equity hedge funds were the leaders in new launches, with 75 funds opening in Q1, making up more than half of all new funds in the quarter. These funds are benefiting from the technology-driven equity market boom, though most of the gains are concentrated in large-cap stocks.

Performance data for hedge funds has been strong in 2024. The HFRI Fund Weighted Composite Index® saw a year-to-date gain of +5.2%, while large funds outperformed smaller ones. Macro strategies, particularly quantitative, trend-following CTA strategies, led the way with a +9.5% gain through May. Equity hedge strategies also showed strong performance, with sub-strategies like the HFRI EH: Quantitative Directional Index advancing +8.8%.

In terms of performance dispersion, the gap between top-performing and underperforming funds narrowed slightly in Q1 2024. The top decile of funds returned an average of +19.4%, while the bottom decile declined by -5.8%. Over the trailing 12 months, the disparity was more pronounced, with the top decile gaining +43.3% and the bottom decile losing -11.9%.

Fees for hedge funds have reached historic lows. Management fees remained stable at 1.35%, while incentive fees fell to 15.96%. For funds launched in Q1 2024, the management fee dropped to an estimated 1.17%, and the average incentive fee fell to 17.17%.

Kenneth J. Heinz, President of HFR, remarked that geopolitical risks and inflation are expected to shape 2024. The combination of strong performance, niche investment strategies, and capital preservation should continue to drive hedge fund growth as institutional investors seek exposure to these ongoing risks. With European and US elections on the horizon, as well as potential military conflicts, hedge fund managers are preparing for a year of policy shifts and economic uncertainties.