Survey reveals hedge fund investors are changing channels

As the adage goes, the one constant in life is change.

No more so is that true than in the hedge fund industry, which over the past few years has morphed into what investors expect and demand, particularly institutions who have collectively re-invented the game – not only in terms of the returns they expect, but what they’re willing to tolerate as fees, transparency and liquidity.

A recent report by PerTrac confirms all that and more (click here to download for free following a short questionnaire). Indeed, PerTrac’s eighth-annual study of the hedge fund universe highlights that, while the  industry has collectively recovered from the aftermath of 2008 and is once again in expansion mode, the composition of where the money is going is changing – dramatically.

How dramatically? On the single-manager front, hedge funds saw an 11% increase in total assets under management last year, rising to $1.6 trillion, according to PerTrac’s findings. New fund launches increased 51% to 1,184.

By contrast, FoHFs saw a 10.5% decline in total AUM, falling to $518 billion, with the overall number of funds remaining largely the same as in 2008. (See chart below showing 2010 AUM totals of hedge funds.)

The number of CTAs, meanwhile, dropped to 1,997 – approximately the same level as in 2008.

What the numbers confirm is that, on the surface, the industry continues to rebound from its dark days of 2008 and early 2009. What they also corroborate are other studies and anecdotal evidence suggesting institutions are moving more capital into alternative strategies.

“As we look across the fund universe, one clear area of growth has been in the number of single-manager hedge funds, and we see that momentum continuing in the future,” Lisa Corvese, managing director, global business strategy at PerTrac, said in a statement. “Overall, the study demonstrates a rebound — with the industry as a whole getting closer to prior peaks.”

The study is a bit apples-to-oranges in that it doesn’t offer a combined total AUM for the industry as a whole. PerTrac’s 2009 report found that total industry AUM rose to $1.4 trillion, an increase of 5.5% over the prior year. While not mentioned in this year’s report, our rudimentary math suggests a not-too-shabby 16% increase.

What’s more, as found last year, a closer look at the numbers suggests that while assets flowing to FoHFs in particular may be on the decline, the number of FoHFs is actually going up. According to the report’s findings, there were 3,196 FoHFs in 2010, which is about the same number that existed in 2008.

To be sure, there are many grains of salt to digest. For starters, PerTrac doesn’t write off a hedge fund until after it has stopped reporting for several months. And as mentioned, there is a lot of double and even triple counting: hedge funds that run the same strategy in multiple currencies, for instance. noted in its coverage of the report in 2008 that the “surprisingly small” change in hedge fund numbers was more the product of anomalies in reporting than actual declines in the number of hedge fund firms.

And there is yet another factor: Some hedge funds have simply stopped reporting to multiple databases – or to any database for that matter – by sheer virtue that there is no obligation to do so. The chart below shows the vast majority still report to only one database, with very close to none reporting to all 10 PerTrac covers – even though most managers reported submitting numbers again in 2010.

So where do all the numbers leave the industry? In short, in pretty good shape. “The perceived value of hedge funds in terms of their ability to provide returns for investors appears to have resurfaced, and investors increased their allocations to single-manager funds,” says the report.

At the same time, PerTrac gives a one-thumb-down to the FoHF side of the industry, noting that on average, FoHFs are fairly small: Only 108 reported AUM of greater than $1 billion; almost 42% reported AUM of less than $25 million, while 70% reported less than $100 million in AUM.

The bottom line is that by PerTrac’s measures, the  hedge fund industry has bounced past its 2008 downturn and is poised for more growth. Beneath the surface though, what the figures appear to show is that the industry continues to change shape dramatically.

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One Comment

  1. Lisa Corvese
    April 29, 2011 at 12:02 pm

    Thank you for the great commentary on our most recent research. In follow-up to your post, it’s important to note that our study actually eliminates the issue that you discuss of “a lot of double and even triple counting: hedge funds that run the same strategy in multiple currencie,for instance.” As noted in our research methodology, we aggregate data from ten leading databases. We then scrub the data using our unique PerTrac ID which eliminates the issue of funds reporting to multiple databases and of funds running the same strategy in multiple currencies. It’s this very process around deduplication which allows us to present the most holistic and comprehensive view of the hedge fund industry.

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