When people talk about how the hedge fund industry growing or shrinking, they are usually referring to hedge funds as a social and media phenomenon, not the more technical definitions such as assets under management.
The result is often a common assumption that starting a hedge fund is easy. For example, people will sometimes be overheard saying “everyone and their dog is starting a hedge fund” or “they’re sprouting up like weeds” or “there are over 10,000 of these funds with new ones being created every day”.
In other words, the media often seems to set the tone more than the actual assets managed by the industry. You’d think that if you golfed with a bunch of hedge fund managers, they’d all be betting thousands of dollars in each hole, drinking champagne and lighting their cigars with twenties.
But (unfortunately for aspiring hedgies) that’s an inaccurate view of the industry as a whole. Last year, we commented on the growing phenomenon of concentration in the hedge fund industry. When the growth of the top 100 hedge funds was removed from last year’s industry size figures, it turned out that the remainder of the industry (99% of the widely assumed 10,000 hedge funds in existence) were actually not growing at all. This, as the media trumpeted how the industry was essentially taking over the world.
Well it appears from this year’s data from Alpha magazine that industry concentration continues unabated (press release). Last year 69% of hedge fund assets were managed by the top 100 firms. This year, 75% of the world’s hedge fund assets were managed by the top 100 firms. According to Alpha, this select group of mega-managers increased assets by $350 billion (from $1 trillion to $1.35 trillion) over the past year.
While that sounds like good news for the average hedge fund manager, the reality is far less rosy. Alpha pegs the industry at around $1.8 trillion this year. Last year, the magazine said the industry was around $1.45 trillion – a difference of…$350 billion. In other words, all of this year’s growth can be attributed to the largest 1 or 2% of all hedge funds.
While members of the top 100 come and go, the inconvenient truth is that the “non-top 100” added zero dollars of assets for the second year in a row. To add insult to injury, hedge fund returns have been positive over that period – meaning investors actually walked away from the average hedge fund.
There are probably 1.8 trillion reasons why this is might be good for the industry and just as many as to why this might be bad. But one thing is for sure: extrapolation of industry growth figures is becoming more and more misleading.
If you golfed with a randomly selected group of hedge fund managers from different firms, chances are most of them haven’t seen their business grow at all over the past 2 years. So you’d probably find that they’d rather keep those twenties after all.
Addendum: HFN’s Q1, 2008 report last week on hedge fund assets shows that the entire industry – mega-funds and all – actually shrunk in Q1. This was mainly due to performance as total new allocations were actually a healthy $125 billion. While HFN did not break the numbers down into mega-funds and the rest of the industry, we’d guess that much of the new allocations also went to the top 100 managers.