Editor’s Letter – Issue 125

August 2017

HAMLIN LOVELL

The global hedge fund industry has made new highs in assets and performance, as have several of the managers profiled in this issue. HFR and Evestment both place industry assets at $3.1 trillion while Preqin put the figure at $3.3 trillion and BarclayHedge is in the middle at $3.2 trillion. Performance in 2017 to July ranges between about 4.5% to 7.5% depending on index providers and strategies. Equity and event-driven managers are generally performing best, and there is a wide spread of performance within the relative value, CTA and macro spaces.

The asset split by strategy varies much more than do assets and performance, according to how managers are defined and categorised by themselves (and/or by database providers). For instance, relative value is largest at $827 billion per HFR whereas Preqin’s relative value tally is just $341 billion. Preqin ranks macro biggest at $955 billion while HFR’s macro total is $579 billion.

Newer and smaller managers are punching above their weight. The fact that HFR’s equal-weighted indices are outperforming its asset-weighted indices shows smaller managers outperforming, in absolute terms. Some 1,006 new funds launched in 2016, according to Preqin. And in terms of numbers, the industry is dominated by smaller funds. Nearly half of hedge funds (and fund of funds) – or close to 5,000 of them – run below $100 million.

But by assets over two thirds of industry assets – orover $2 trillion – comes from those nearly 600 firms that run over $5 billion (per HFR), and have populated The Hedge Fund Journal’s US50, Europe 50 and Asia 25 rankings. Institutions now contribute the majority of assets, with most of this invested on behalf of millions of beneficiaries such as pension fund members, insurance policyholders, university students and charity recipients. Over 5,000 institutions are invested in hedge funds, according to Preqin. The predominance of institutions is perfectly consistent with the growth of liquid alternatives since a significant proportion of assets in UCITS and ’40 Act comes from institutions.

Funds of funds numbers have declined from 2,462 in 2007 to 1,482 in Q2 2017, per HFR. Assets have been steadier, hovering around $600 billion for a number of years now, say HFR, which suggests that fund of funds’ percentage of growing industry assets continues to decline, amid small net outflows. Two caveats apply however. Where funds of funds are advising managed accounts, the associated assets will nearly always appear under the Form ADV regulatory filing of the account owner (incidentally, the same issue explains why assets of currency, macro, managed futures and CTA managers – often substantially housed in managed accounts – are understated in rankings based on such filings). And when funds of funds are proffering buy lists, they may not even know the quantum of assets following their recommendations. Still, even the headline figure for funds of funds still represents 20% of industry assets. Yet the most important investors are often the managers themselves. We know of many hedge funds where internal assets are well above 20%. Though the industry is institutionalising, it remains far more entrepreneurial than most other segments of the global asset management industry.