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Multi-strategy hedge fund launches tumble in first quarter, says Preqin

Screens showing the Hang Seng stock index and stock prices are seen outside Exchange Square, in Hong Kong

By Nell Mackenzie

LONDON (Reuters) - New multi-strategy hedge fund launches accounted for less than one in 10 of new funds in the first quarter, down from about one in four in the last quarter of 2023, according to data provider Preqin, a sign that investors witnessing higher market volatility might be seeking less risky prospects.

Launches for this kind of hedge fund, housing different kinds of trading strategies, have fallen to their lowest in around a year since Preqin started collecting this data.

"The current economic climate and market volatility might be prompting investors to favor more specialized or less complex investment strategies," said Bruno Schneller, managing director at Erlen Capital Management, which invests in hedge funds.

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He added that less interest to launch new multi-strategy funds may also stem from high costs needed for operational infrastructure and hiring.

While the S&P 500 and the European STOXX 600 have risen roughly 7% and 6% respectively so far this year, volatility has also increased with the VIX index hitting its highest level since October earlier in April.

Only seven multi-manager hedge funds manage assets larger than $10 billion, according to Barclays' prime brokerage research. Of 47 multi-manager funds the bank tracks, 32 oversee less than $5 billion of assets.

Annualised performance of hedge funds launched in the last three years was about 7.9%, almost a percentage point less than established incumbents that managed over $5 billion, said an April report by Barclays prime brokerage.

This hedge fund strategy failed to outperform compared to the wider industry last quarter, posting on average a 3.3% return compared with a 4.4% performance by the broader segment, a Barclays report focused on multi-manager hedge funds in the first quarter of 2024 showed.

That contrasts to the last three years where multi-manager hedge funds returned an average 6.6% performance, about a percentage point higher than peers.

Hedge funds taking bets on stocks posted the highest returns versus other strategies and had the largest share of new launches in the first quarter, the Preqin report showed.

Funds that take long and short positions in equities accounted for about 38% of the industry's new launches in the first quarter, the highest proportion since the second quarter of 2023, and 2% higher than the previous quarter, Preqin said.

A short trade bets an asset price will fall in value, a long trade anticipates a rise.

These hedge funds marked about a net 17% positive return over the last 12 months, the highest performance compared with other strategies during that time, Preqin said.

Given the opportunistic trading environment, investors may apply more pressure for these hedge funds to perform this year.

"Underperforming managers will experience above average redemptions with these assets being reinvested in better performing managers," said Don Steinbrugge, founder and chief executive of Agecroft Partners, a hedge fund consulting firm.

(Reporting by Nell Mackenzie; editing by Dhara Ranasinghe and Jonathan Oatis)