By Nell Mackenzie
LONDON (Reuters) - Investments to new hedge funds in 2023 fell to new lows, while established hedge funds hiked fees to the highest on record, said a client report by Goldman Sachs (NYSE:GS) dated Friday and seen by Reuters on Monday.
This illustrates a growing bias towards established and bigger hedge funds that average higher returns for their investors, said Goldman Sachs.
Hedge fund launches fell in Europe and the Asia Pacific region by 6% and 8% while rising 14% in the U.S. But Goldman Sachs still maintained that 2023 marked a second consecutive record low for new launches by hedge funds that it tracks.
However, management fees, where the investor pays back a proportion of the winnings a hedge fund makes, rose to their highest since 2012, Goldman Sachs said.
Investors, less focused on fee reduction, have concentrated on agreeing better terms with hedge funds, Goldman said, which based its findings on 358 interviews in December 2023 that accounted for over $1 trillion in assets allocated to hedge funds.
One such suggestion was having fees fall as AUM rises.
Separately, around a quarter of those surveyed agreed with their hedge funds that performance would have to surpass a certain threshold - or hurdle rate - before the application of fees. Almost half said they planned to ask for this in 2024.
Almost a fifth said they would try for a loyalty discount.
And 11% said in exchange for a fee reduction they would agree to lock up their money with their hedge funds for longer, the report said.
Despite this, hedge fund investors did not end 2023 consistently happy with how their hedge funds performed.
The $3.9 trillion industry underperformed traditional stock and bond portfolios by 9%, the worst result in nearly three decades.
This year, investors expect them to do better, the bank said.
If hedge funds can't manage a 7.5% positive result, what was the point of taking fees, the complex investments and locked away money, said one unnamed allocator quoted in the report.
At the end of 2023, 15% of allocators said they planned to decrease their hedge fund holdings, while 31% said they would add more exposure.
Despite any optimism expressed in 2022, the bank noted that over the course of 2023, only 28% of allocators increased their money in hedge funds versus 42% that said they would at the end of 2022.