Launches of hedge funds have dropped to their lowest level since the 2008 financial crisis, as some managers struggle to make money in falling markets and huge firms such as Millennium and Citadel hoover up traders who once might have branched out on their own.
Launches globally fell to 71 in the third quarter of last year, the latest data available show, down from 132 in the third quarter of 2021, according to data group HFR. That marks the lowest level since the final three months of 2008, when just 56 new funds were spawned during the depths of the financial meltdown.
“The months after stressed periods such as the global financial crisis and the stressed market that the end of quantitative easing brought have made it a difficult period to launch a new hedge fund,” said Donald Pepper, co-chief executive of hedge fund Trium Capital and a former Goldman Sachs banker — although he expects an improvement this year.
The data comes during a tough period for much of the $3.8tn hedge fund industry, with many traders struggling to cope with sharp falls in equity and bond markets last year, triggered by a sharp pick-up in inflation and steep interest rate rises.
Early numbers from HFR show hedge funds lost 4.4 per cent on average last year, with equity managers including some of the Tiger cubs — funds that can trace their origins back to Julian Robertson’s Tiger Management — being hit hard by the major sell-off in highly valued technology stocks.
While some parts of the industry made big gains — including macro traders such as Chris Rokos and Caxton’s Andrew Law, as well as many computer-driven funds — the losses from other funds have not helped attract investors in what has long been a tough environment for raising new money. Funds overall suffered net outflows of $190bn since the start of 2016, according to HFR.
There has nevertheless been a number of high-profile launches in recent years, such as Fifthdelta, started by former Citadel traders in 2021, and General Industrial Partners, a new short selling hedge fund planned by the founders of Gotham City Research and Portsea.
But for many traders the prospect of joining one of the large multi-manager firms, which employ tens or even hundreds of different trading teams and which often lock up investor money for years, is far more attractive than having to meet the high costs of setting up a new firm out of their own pocket. According to Quentin Thom, co-head of perfORM Due Diligence Services, such costs have been pushed higher by the coronavirus pandemic.
Marlin Naidoo, global head of capital introduction at BNP Paribas, said: “A key driver in the reduction of new launches is the growth we have seen in the multi-manager space.”
Such firms have been among the most consistent performers in recent years. Ken Griffin’s Citadel, for instance, gained 38 per cent last year, while rival Millennium Management made 12.4 per cent.
Multi-manager funds’ performance and their ability to locate traders in low-tax locations such as Dubai are among factors that mean they “are now seen as a less risky, more lucrative and more flexible working environment than in previous years”, said Thomas Hennelly, director at recruitment firm Paragon Alpha.
That “has certainly contributed as to why candidates are more inclined to join them, rather than start their own fund”, he added.