With rampant consolidation in the alternative investment industry, the top players in each discipline (e.g. hedge funds, private equity, real estate…) now control a significant proportion of assets. As a result, the views and experiences of these rarefied groups are becoming more representative of the greater industry. This fact was surly not lost on the good folks at Watson Wyatt, who recently polled the top 100 managers of alternative assets.
The report is available for free (with quick registration) here and makes for interesting reading. The firm examined only the assets managed by these asset managers, not their retail or endowment assets. The overall size of the pension allocations to the top 100 alternative asset managers in 2008, according to the firm, was $817 billion.
Despite some media reports that this number was a poor showing for the industry (ex. “Allocations to alternative assets dip“), it was down only 1% from last year’s $823 billion. In North America, the number actually grew from $395 billion (48% x 823b) to $433 billion (54% x $817b) – a 10% increase…
Real estate continued to be the drug of choice for pension funds across the globe, although funds of private equity funds and commodities jumped from $172b to $236 billion. Funds of hedge funds assets managed by the top 100 fell from $131 billion to $106 billion.
In 2008, there were 28 funds of hedge funds in the top 100. When the top largest funds of hedge funds were analyzed on their own, the overall AUM figure was closer to $123 billion according to Watson Wyatt.
A simple sanity check confirms this number: Assuming the entire hedge fund industry manages $1.2 trillion, and roughly half of all investment dollars are from institutions, the total institutional investment in hedge funds is about $600 billion. If about half of all hedge fund allocations are made via funds of funds, then the total institutional investment in funds of funds would be about $300 billion. Further, if you assume that two-thirds of those institutions are pensions and two-thirds of those are “top 100” managers, then you get down to about $130 billion – pretty close to Watson Wyatt’s $123 billion estimate.
In case anyone needs more evidence of concentration in the fund of funds industry, check out this graph from the report:
As you can see, the top 10 funds each manage an average of 5% of the top 50 funds’ pension AUM. The next 30 manage an average of 1.3% and the final 10 manage less than 0.5% each. The remaining few thousand funds of funds are left to fight over, at best, another $100 billion.
However, the level of concentration seems to have dropped as the largest dozen managers seem to have taken the biggest hit in 2008. The graph below shows what amounts to a falling Gini coefficient (see related post: Hedge Fund Asset Concentration: Is the Gini climbing back in the bottle? ) for the hedge fund industry.
Interestingly, the story was reversed in the private equity industry with the top dozen managers now managing a largest proportion of the AUM than they did at the end of 2007.