Biggest hedge funds will keep lion's share of customers in 2023, data shows

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By Nell Mackenzie

(Reuters) - The top 5% of the world's hedge fund managers are set to take 80-90% of investor inflows in 2023, according to new research from Agecroft Partners which raises money for hedge funds.

The data highlights the dominance of a small group that has squeezed the total pool of hedge funds to its smallest since 2009.

Don Steinbrugge, founder and chief executive at Agecroft Partners, said in the note that the more than 2,000 global institutional investors his firm has been in dialogue with may have got it wrong for 2023 in sticking with big hedge funds, even though it was the larger firms that outperformed last year.

The larger a hedge fund manager gets, the harder it is to trade in size and profit from less efficiently priced parts of the market.

Michael Oliver Weinberg, who previously worked at the Dutch pension fund APG and now is teaching at Columbia Business School, agreed.

“As some of these managers have grown immensely, it will be more difficult for them to generate the same level of returns they have historically."

"Many of them benefited from smaller size and ability to invest in more capacity constrained trades and markets, that they now may be too big to invest in,” he said.

Data compiled by Hedge Fund Research shows that on average hedge funds were down 4.1% last year through November.

The $100 billion investment manager AQR had multiple funds which ended 2022 with performance numbers over 30%, including its Managed Futures HV Fund, at 50%. The $60 billion D.E. Shaw's biggest hedge fund ended 2022 up 24.7%.

The $138 billion U.K. headquartered Man Group reported on its website, as of the end of November 2022 a 13.1% performance on its AHL Diversified programme.

The $59 billion hedge fund manager Millennium returned 9.8% in its International Ltd Fund for the year, said industry research.

Smaller managers were squeezed by expenses and lacklustre revenues last year, said Steinbrugge. The number of operating hedge funds fell to 9,163 at the end of the third quarter, the lowest number since 2009, according to HFR.

"As a result, we expect the closure rate to continue to rise for small and mid-sized hedge funds," said Steinbrugge.