New Hedge Funds Struggling as Established Ones Increase Fees
Goldman Sachs client report reveals challenges facing new hedge funds and unprecedented fee hikes by established ones.
According to a recent report by Goldman Sachs, new hedge funds are encountering difficulties, while established funds are raising their fees to record-breaking levels. The data shows that investment in new hedge funds reached an all-time low in 2023, while established funds charged the highest fees ever seen in the industry.
This trend highlights a growing preference among investors for larger, more established hedge funds, which typically offer higher returns. Launches of new hedge funds declined in Europe and the Asia Pacific region, but interestingly, there was a noticeable increase in the United States.
Despite the overall decline in new launches, management fees have experienced a surge. The Goldman report, based on interviews with allocators overseeing over $1 trillion in assets allocated to hedge funds, indicates a shift in how investors are approaching hedge fund fees. Discussions are centered around methods such as reducing fees as Assets Under Management (AUM) increase, and implementing performance thresholds that must be met before fees are applied.
To negotiate for fee reductions, many allocators plan to seek loyalty discounts or agree to longer lock-up periods. This signifies a shift in their approach to hedge fund investments, as they aim to secure better terms while still maintaining exposure to potentially lucrative opportunities.
However, the industry’s performance in 2023 fell short of many investors’ expectations, significantly underperforming traditional stock and bond portfolios. As a result, some investors are considering reducing their hedge fund holdings, regardless of the overall sense of optimism and plans for increased exposure by others at the end of the year.
It appears that investors hold mixed sentiments about the value provided by hedge funds, particularly when considering the high fees and investment restrictions associated with them. This has led to a reevaluation of investment strategies, with a focus on ensuring adequate returns and flexibility in the face of market volatility.
Source: Goldman Sachs report
Analyst comment
Negative news: New hedge funds are struggling, while established funds are increasing fees to record-breaking levels. The market will likely see a decline in new hedge fund launches and a shift towards larger, more established funds that offer higher returns. Investors may seek fee reductions and better terms, potentially reducing their hedge fund holdings due to underperformance in 2023. Overall, there is a reevaluation of investment strategies to ensure returns and flexibility in a volatile market.
