Hedge funds have capped a hugely profitable 2023, pocketing an estimated $67 billion in performance fees after strong returns across global markets. The industry has seen its most lucrative year since the global financial crisis.
Top Performers Lead Pack
Several big name managers led the profit bonanza, according to data provider LCH Investments. British based TCI Fund Management, run by renowned activist investor Chris Hohn, topped the charts – scoring an estimated $13 billion in fees after returning 41% to investors.
Ken Griffin’s global giant Citadel also excelled, making over $7 billion as its main Wellington fund gained 38%. Meanwhile, billionaire investor William Ackman bounced back from a painful 2018 to guide his Pershing Square fund to a 58% return, believed to have yielded $2.7 billion in fees.
Key 2023 Returns:
| Fund | Return | Est. Fees |
|-------------------|--------|-----------|
| TCI | 41% | $13bn |
| Citadel Wellington| 38% | $7bn |
| Pershing Square | 58% | $2.7bn |
LCH estimates the industry made $67 billion overall – smashing the previous high of $63 billion in 2007. The exact figures remain private but such rewards highlight the extreme profitability top managers can achieve after strong market runs.
Factors Behind Growth
Several drivers fueled the bonanza year. Equity markets gained over 15% during 2023 despite high inflation and rate hikes, creating fertile ground for fundamental stock pickers like TCI. Meanwhile macro managers profited from higher volatility and global uncertainty around events like war in Ukraine.
The lucrative paydays will likely intensify scrutiny on the secretive industry. Hedge fund bosses can make billions even during market crashes, while heavily taxed ordinary workers face layoffs and plunging retirement savings. Critics argue the system is rigged in favor of the ultra-wealthy.
Hedge Fund Fee Structure:
- "2 and 20" fees
- 2% annual management fee
- 20% on returns above a hurdle
- Managers keep 20% of returns
- Can make billions in strong years
- Fees paid even if overall fund loses money
Calls For Reform
Several politicians have argued for reforms like higher taxes on carried interest earned by fund managers. Progressive Democrats also advocate closing the “management fee waiver” loophole that allows mangers to skip taxes on over $3 billion a year in fees.
However industry advocates counter that hedge funds provide essential liquidity while their bosses pay full income taxes on performance fees. They also highlight funds’ poor returns during 2022’s bear market – estimating the industry as a whole lost money last year.
Hedge Fund Performance Past Two Years
| Year | Overall Return |
|------|----------------|
| 2023 | +15% |
| 2022 | -4% |
Managers themselves are likely to fight any hit to their lucrative pay structures. Several ultra-high net worth individuals have been expanding political donations in recent cycles.
Outlook for 2024
Market observers expect the bonanza profits to continue through 2024 amid optimism for a “soft landing” for the global economy. However others caution that risks like higher rates, inflation, or sudden geopolitical events could easily trigger losses.
For now fund bosses are mostly bullish – veteran manager Ray Dalio told clients this week he sees a “good probability” for another strong year thanks to stocks still lagging bonds. But unpredictable shocks have burned hedge funds before, and 2023’s record profits could easily invert within months.
To err is human, but AI does it too. Whilst factual data is used in the production of these articles, the content is written entirely by AI. Double check any facts you intend to rely on with another source.
