Welcome to the second edition of The Hedge Fund Journal’s US50 published in association with Newedge Prime Brokerage Group.
Since the inaugural US50 published by us in mid-2008 the industry has been on a roller coaster. The credit crunch and subsequent market downturn – the biggest in over 70 years – probably marks the biggest blow to hedge funds since the market crash of 1973-74. A majority of managers suffered hefty losses and over 1500 funds closed. Among the US50, all but a handful of funds lost assets under management. As a result the total AUM of the US50 fell 17% to $714.4 billion at January 31 from $859.9 billion in our 2008 survey.
No threat to US hegemony
The past decade has witnessed many hedge funds spring up in Europe and, more recently, Asia to service investor needs. For the time being, however, this doesn’t look likely to pose any threat to the hegemony of the US hedge fund market and the many iconic firms that bestride it. The US remains by far the biggest market for hedge funds, accounting for over two-thirds of an estimated global asset base of $1.8 trillion. Even though regulatory change is a certainty in all the leading jurisdictions, the relative balance of the hedge fund industry won’t be shifting away from the US any time soon.
A simple example illustrates this. The two smallest firms in the US50, Blue Ridge Capital and Perry Capital, each with AUM of $6.5 billion, would have been just outside the top 10 in our 2009 Europe50 survey. In Asia, firms of this size would be, by some distance, the largest in the region. The size of the 10 biggest US firms, with assets of $293.5 billion, gives evidence of the increasing concentration of inflows as institutional investors continue to see their importance grow as the biggest source of hedge fund allocations.
Such is the magnitude of concentration that it is even at work among the top 10. In this respect, JPMorgan Asset Management (including Highbridge Capital) and Bridgewater Associates, ranked 1st and 2nd respectively now and in 2008, are among a very small number of firms to have actually swum against the tide and boosted AUM over the past two years. This sees JPMorgan in pole position with assets of $54 billion (up from $48.1 billion in 2008) and Bridgewater in the runner up slot with assets of $45 billion (up from $43 billion). Even Paulson & Co., which so spectacularly exploited the sub-prime debacle, lost AUM as redemptions saw funds under management fall to $32 billion (down from $35 billion), though that performance was strong enough to push the firm into 3rd place, up one rung from 2008.
Duress leads to cost cuts
In a time of duress such as 2008-09 it is natural that many firms have narrowed their focus and cut costs. The overwhelming majority of firms in the US50 have lost 20% or more of AUM and have seen performance fee income plunge. Happily this isn’t a universal experience. Indeed, there is one outsize outperformer: Baupost Capital founded by renowned value investor Seth Klarman. Baupost has risen in tandem with the sharp rebound in equity markets and now occupies 7th position in the US50 with AUM of $22 billion (compared with 34th position and AUM of $12 billion in 2008).
Just as there have been some firms move up the rankings several have slid down. DE Shaw Group has retreated to 6th position from3rd in 2008 as AUM declined to $23.6 billion from $37.1 billion. It is perhaps indicative of the staying power of firms in the top echelon of the hedge fund industry that DE Shaw could lose around 40% of its assets yet still feature comfortably in top 10. Others that stand out for losing ground in the survey include James Simons’ Renaissance Technologies (down to 15th from 7th) and Harbinger Capital, which fell to 38th position from 8th as AUM fell by nearly 70% to $8.5 billion.
Broadly indicative of the forces hitting most groups is the experience of Och-Ziff Capital Management: it sits in 5th position in 2010 (as it did in 2008) but with AUM reduced to $24 billion from $33.3 billion.
Evolving US trends
Numbers and rankings can, of course, only go so far in uncovering the significant changes that are affecting US hedge funds. In this respect, it is useful to consider the US industry’s evolution across several key trends such as investment style, capital raising and regulation.
Some of the firms showing the biggest decline in AUM in the US50 got caught in strategies where liquidity suddenly vanished in late 2008. This saw performance take a substantial hit (once positions could be closed out) with an adverse knock-on affect on redemptions (once the funds were available to refund investors). The upshot is that illiquid strategies, including asset-backed lending, distressed and fixed income arbitrage, among others, now simply must have full transparency. The flip side of this is that liquid and transparent investment styles are in the ascendency. This favours shops with institutional grade infrastructure and a record of meeting redemption requests. Increasingly, such firms are multi-strategy or multi-manager in nature.
Since our previous survey capital raising has seen substantial change. Two years ago funds of hedge funds accounted for around 40% of AUM raised by US firms. Now that figure has been cut by more than half with little indication that the trend has yet run its course.
Indeed, more prevalent use of managed accounts may hurt some of the weaker funds of funds as institutional investors gear up to invest directly into single manager funds and platforms. The trend for institutions to go direct may also have the consequence of bringing more foreign money into many of the firms featured in the US50. The sheer scale of these big US firms means that they are likely to benefit disproportionately should sovereign wealth and overseas pension funds look to increase their exposure to absolute return funds and the US market.
The final area of change affecting US hedge fund firms is regulation. The Volcker rule limiting investment bank prop trading looks like a shot across the bow rather than a fully fledged policy. New rules restricting short selling are expected to be enacted by the Securities and Exchange Commission but the changes are unlikely to fundamentally change how US markets function.
Registration, meanwhile, of US funds is a given and it is also possible that the income threshold for accredited investors will be raised further. Against this relatively benign backdrop, however, is the uncertainty posed by European Union deliberations over an Alternative Investment Fund Managers Directive and whether this will hurt medium sized US funds in their marketing efforts overseas.
As many readers will be aware, the US has a stringent legal framework in terms of what information funds can and cannot provide. Given this environment, many of the hedge funds contacted for this survey were very concerned not to do anything that could be construed as solicitation. In consequence, while most firms were prepared to provide data on their AUM figure, they were more reluctant to provide information about fund names, strategies and portfolio managers. As a result, we have sourced this information from other sources and sought to verify it where possible.
In closing, we would like to thank Newedge Prime Brokerage Group for its continued support of this survey.
To download a copy of the survey, please click here