A recent report from hedge fund fundraising firm Agecroft Partners forecasts that the world’s top hedge fund management firms are set to get the bulk of investor inflows this year. The fact that just the top 5% of these firms will be taking the lion’s share is proof that the total pool of global hedge funds has dwindled considerably for over a decade.
However, this development could pose issues for the bigger hedge fund companies later on. According to Agecroft founder and chief executive officer Don Steinbrugge, over 2,000 institutional investors whom his company has dealt with could be making a mistake by keeping their sights on bigger hedge funds. This is despite the fact that larger firms outperformed in 2022.
In Steinbrugge’s opinion, the bigger a hedge fund manager becomes, the more it becomes harder to trade in terms of size and profit from less efficiently priced market sectors.
The Agecroft report also pointed out how smaller fund managers found themselves at the mercy of both increasing expenses and lower-than-expected revenues in 2022.
The Experts Weigh In
Steinbrugge’s point of view is shared by Columbia Business School adjunct professor of finance and economics Michael Oliver Weinberg. Weinberg, who previously worked for Dutch pension fund APG, says that a number of these hedge fund managers have grown exponentially over the past several years and, as such, will find it difficult to generate returns at the same level over time.
Weinberg added that these hedge funds previously benefited from a smaller size as well as their flexibility when it comes to more capacity-constrained trades and markets. Now, they may be too large to invest in.
Another report, this time from Hedge Fund Research (HFR) also saw a 4.1% decrease through November 2022 among average hedge funds. The HFR report added that the number of operational hedge funds dropped to its lowest since 2009, with just 9,163 in operation as of the end of Q3-2022.
For Agrecroft’s Steinbrugge, this means that the closure rate for small and medium-sized hedge funds can be expected to rise this year.
Hedge Fund Performance in 2022
American investment management firm AQR reported that a number of its funds ended the year with their performance well above 30%. These include the firm’s Managed Futures HV Fund which ended 2022 at 50%.
Meanwhile, the United Kingdom’s Man Group, a $138 billion firm, reported a 13.1% performance for its AHL diversified program as of the end of November. $60 billion firm DE Shaw, on the other hand, saw its largest hedge fund’s performance rise by 24.7% at year’s end.
$59 billion global investment firm Millennium likewise reported a 9.8% performance for its International Limited Fund for 2022.