Hedge Fund Launches at Lowest Level in 25 Years

It has been widely reported over the last few weeks that Hedge Fund launches in 2024 were at their lowest level in 25 years and there are multiple theories as to why.  Naturally, I have my own perspective.

As of the second quarter of 2024 there were over 30,000 hedge funds operating worldwide with approximately 70% of them being managed by US based fund managers.  Is the drop in new launches a simple economic principle of supply and demand?

From a supply perspective, whether it is a High Net Worth individual or an Institutional Investor looking to make an investment, the hedge fund profile they are looking to allocate to likely already exists.  The Hedge Fund community has always found new and interesting ways to invest, whether it be a new strategy, or some type of “new” security, the ideas have flowed for years.  Perhaps we have started to run out of ideas.

With the above being said, new funds are still going to come from emerging managers who are breaking away from an existing role at a large fund to do it on their own.  Will their ideas be new?  Possibly not, however, they may be able to do it better than someone else already in the market.

With the Nasdaq Composite rising over 30%, the S&P 500 over 24% and the Dow Jones up 13% in 2024 it raises the question as to why pay a 2% Management Fee and 20% Performance Fee when one can get returns in the 13 -30% range by simply putting money into a diversified stock portfolio?  Has this diminished the demand for new funds?  

As we all know, these rises in the market cannot last forever.  In my opinion, one medium term correction in the stock market and we are going to see a big uptick in new launches.  Once again, as the cycle has been for many years, there will be a return to both new funds that should be able to outperform the market and, of potentially more importance, new funds that can provide capital preservation.  

Having worked with alternatives for nearly 30 years now, I have seen cycles from the highest of highs with hedge funds to the lowest of lows.  Right now we are riding a wave of new private equity managers, which I believe to be part of this cycle.  Is it possible that next year’s headline will be “New Private Equity Funds at Lowest Level in 25 Years”?  I hope not, but I would also think the accompanying headline would read “New Hedge Funds Clock Significant Bounce Back in 2025”.  

Only the cycle will tell.