Key Takeaways
- • 2023 hedge fund launches have slumped to their lowest level since 2017, with only 180 funds launched or planning to launch year-to-date, according to Preqin data cited by Reuters—a sharp reversal from the 614 new funds launched in 2021.
- • Industry capital remains resilient above the $4 trillion threshold, but fundraising headwinds from market volatility, banking sector turmoil, and tougher U.S. and European fundraising environments are constraining new fund formation.
- • The 2023 decline marks a dramatic slowdown from 2021's recovery period, when only 527 funds liquidated (the lowest annual liquidation rate since 2004) and 614 new launches occurred, driven by investor demand for portfolio protection amid macroeconomic uncertainty.
- • Hedge fund fee compression has accelerated, with management fees declining to historic lows of 1.36% and incentive fees falling to 16.1% as of 2021—the lowest levels since HFR began tracking data in 2008.
Summary
Global hedge fund launches have contracted sharply in 2023, falling to levels not seen since 2017 despite industry capital remaining above $4 trillion. According to Preqin data reported by Reuters on May 9, 2023, only 180 new funds have started or planned to start trading year-to-date—a substantial decline from the 614 new funds launched in 2021, which represented the strongest calendar year for fund formation since 2017 itself (when 735 funds launched).
The pullback reflects a significant reversal in fundraising momentum driven by multiple headwinds. Ongoing market volatility, current turmoil in the banking sector, and tougher fundraising environments across the U.S. and Europe have created challenging conditions for emerging fund managers. This contrasts sharply with 2021, when the hedge fund industry experienced a recovery characterized by strong investor demand for alternative strategies positioned to protect portfolios amid macroeconomic and geopolitical uncertainty.
The 2021-2023 divergence underscores the cyclical nature of hedge fund formation. During 2021's favorable conditions, fund liquidations hit their lowest level in nearly two decades, with only 527 funds shuttering that year—the minimum annual figure since 2004 when 296 funds liquidated. Over the 17-year span from 2004 to 2021, total industry capital expanded from approximately $973 billion to over $4 trillion. Performance dynamics during the recovery period—particularly the HFRI 500 Index's 9.9% return in 2021 and its narrow 1.2% decline through February 2022—demonstrated hedge fund resilience during equity market disruptions. Uncorrelated macro strategies and commodity-focused approaches led performance in early 2022.
Despite reduced launch activity, the industry has witnessed structural fee compression. By 2021, average management fees had declined to 1.36% (down from 1.37% in 2020) while incentive fees fell to 16.1% (from 16.35%), representing the lowest fee levels since HFR began publishing estimates in 2008. This compression reflects institutional investor pressure on pricing, even as capital preservation continues to attract allocations to the alternative investment space during periods of macroeconomic stress.
The pullback reflects a significant reversal in fundraising momentum driven by multiple headwinds. Ongoing market volatility, current turmoil in the banking sector, and tougher fundraising environments across the U.S. and Europe have created challenging conditions for emerging fund managers. This contrasts sharply with 2021, when the hedge fund industry experienced a recovery characterized by strong investor demand for alternative strategies positioned to protect portfolios amid macroeconomic and geopolitical uncertainty.
The 2021-2023 divergence underscores the cyclical nature of hedge fund formation. During 2021's favorable conditions, fund liquidations hit their lowest level in nearly two decades, with only 527 funds shuttering that year—the minimum annual figure since 2004 when 296 funds liquidated. Over the 17-year span from 2004 to 2021, total industry capital expanded from approximately $973 billion to over $4 trillion. Performance dynamics during the recovery period—particularly the HFRI 500 Index's 9.9% return in 2021 and its narrow 1.2% decline through February 2022—demonstrated hedge fund resilience during equity market disruptions. Uncorrelated macro strategies and commodity-focused approaches led performance in early 2022.
Despite reduced launch activity, the industry has witnessed structural fee compression. By 2021, average management fees had declined to 1.36% (down from 1.37% in 2020) while incentive fees fell to 16.1% (from 16.35%), representing the lowest fee levels since HFR began publishing estimates in 2008. This compression reflects institutional investor pressure on pricing, even as capital preservation continues to attract allocations to the alternative investment space during periods of macroeconomic stress.
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