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Hedge Funds 2010
Hedge Funds 2010
Hedge Funds 2010
IFSL RESEARCH
HEDGE FUNDS 2010
APRIL 2010 WWW.IFSL.ORG.UK
OVERVIEW
Global hedge fund assets under management posted strong gains for much of Chart 1 Global hedge funds
2009 following sharp falls seen in the previous year due to conditions brought
about by the global economic downturn. This IFSL report provides an
$bn assets (bars) Number (line)
London’s role as the second largest global centre for hedge funds.
2,000
1,800
2009 to $1,700bn1 (Chart 1). This followed a 30% decline in the previous year.
1,400
Redemptions continued for the second year running, albeit at a slower pace.
1,200
The 19% return in 2009, the best hedge funds’ performance in a decade, more
8,000
1,000
than made up for the $85bn in net outflows. The number of hedge funds
800
totalled around 9,400 at the end of the year, a reduction of more than 1,000
600 6,000
from the peak seen two years earlier. New hedge fund launches however
400
The fund of hedge funds industry has been particularly affected by the
economic downturn and the reputational damage following the revealing of the
Madoff fraud in 2008. Assets of fund of funds totalled around $500bn at the
Chart 2 Liquidation of impaired assets
end of 2009, down 17% from the previous year, and over 40% below the peak
seen two years earlier. The proportion of single manager hedge fund assets
$bn Impaired assets Assets returned to
originating from fund of funds fell to 30% in 2009 from 40% a year earlier.
standard liquidity terms
174
Flow of funds The surge in redemptions which started in the latter part of 2008
145
41%
continued in the first half of 2009. Some hedge funds were forced to suspend
54%
redemptions because selling illiquid assets would have exposed the remaining
116 71%
been less inclined to redeem assets. More than a half of impaired assets at the
58
end of 2008 were returned to standard liquidity terms by the end of 2009
59%
46%
(Chart 2). The asset raising environment slowly improved during 2009 with a
29 29%
return to net asset inflows in the second half of the year (Chart 3).
14%
0
Q1 2009 Q2 2009 Q3 2009 Q4 2009
hedge funds with 68% of the total at the end of 2009, down from 82% a decade
Source: Credit Suisse / Tremont Hedge Index
New York is the world’s leading centre for hedge fund managers, followed by
London. IFSL estimates that around 41% of global hedge fund assets were
managed from New York in 2009, down from over 50% at the start of the
decade. London’s 20% share of the global total was unchanged from the
previous year. London is by far the largest centre in Europe for the management
of hedge funds. At the end of 2009, three-quarters of European hedge fund
assets totalling nearly $400bn were managed out of the UK, predominantly
from London. The UK is also a leading centre for hedge fund services such as
administration, prime brokerage, custody and auditing.
1 Estimates of the size of the hedge fund industry vary due to restrictions imposed on advertising and 1
reporting of performance by hedge funds. As there are no authoritative estimates this report is based on
commercial databases and index providers which rely on information provided voluntarily.
April 2010 Hedge Funds
-200
redemptions towards the end of 2008 because selling illiquid assets would have Number
liquidations
exposed remaining investors to bigger potential losses. More than a half of 2,500
these impaired assets were returned to standard liquidity terms by the end of 2,000
Launched
2009 (Chart 2). The asset raising environment slowly improved during 2009
Liquidated
with a return to net asset inflows in the second half of the year (Chart 3). 1,500
Number of hedge funds The number of hedge funds totalled around 9,400 at
1,000
the end of 2009. Three-quarters of these were single manager hedge funds and
500
the remainder fund of hedge funds. This 2009 total represents a reduction of 0
more than 1,000 from the peak seen two years earlier (Chart 4). The fall was
caused by funds closing due to losses, lack of liquidity and redemptions as
-500
investors looked for safer investments. New hedge fund launches however
-1,000
in offshore locations. The Cayman Islands was the most popular registration
location and accounted for 39% of the number of global hedge funds. It was
40 82%
followed by Delaware (US) 27%, British Virgin Islands 7% and Bermuda 5%.
68%
Around 5% of global hedge funds are registered in the EU, primarily in Ireland
20
and Luxembourg. 0
2
April 2010 Hedge Funds
hedge fund assets with over two-thirds of the Chart 6 Top hedge fund cities
total. Its share, however, was well below its
80% share at the start of the decade. Europe % share of total hedge
doubled its share during this period (Chart 5). fund
% share of largest 100 hedge
assets by location of London funds assets by location of
manager manager
Greenwich 6%.
Sweden.
Chart 8 Global hedge fund returns
Many hedge funds in Europe have recently launched UCITS III compliant
stand-alone onshore fund vehicles which are allowed to be distributed
average annual return, %
range of strategies that use derivatives and limited leverage within a regulated 25
found that 35% of investors in its Table 1 UCITS Absolute Return Funds
15
3
April 2010 Hedge Funds
Asia, and more particularly China, is taking on a more important role in the
Equity Market Neutral
2.2
global hedge fund industry more as a source of funds than a location for
Event Driven -26.5
6.7
Asian hedge funds’ assets with around a quarter of the total each. Other
-1.3
-6.5
Hedge funds’ 2009 return globally averaged 19%, the highest for a decade
Multi-Strategy -19.5
-1.7
(Chart 8). This comes just one year after hedge funds posted the worst
-30 -25 -20 -15 -10 -5 0 5 10
annual loss in history brought about by the falls in equity markets, a ban on
Source: Credit Suisse/Tremont Hedge Fund Index
long/short strategies typically account for the leading share of strategies. While
31%
40 29%
nine out of ten of the most common investments strategies saw a net outflow
30 54%
of funds in the first half of 2009, only four experienced outflows in the second
48% 44%
20 44%
half of the year. Long/short equity, event driven, managed futures saw the
31% 26%
10
SOURCES OF FUNDS
Individuals Fund of funds Pension funds
Corporations Endowments and foundations
5%.
14% Public pension
funds UK
Private pension funds
Endowment plans
4
April 2010 Hedge Funds
down 17% from the previous Table 2 Largest hedge funds Chart 12 Global Fund of Hedge Funds
year and nearly a half below the industry
peak seen two years earlier Largest hedge funds ( January 2010) $bn, assets under Number of
significantly underperformed hedge funds in 2009 with around 10% in returns 100
in 2009, much less than the 19% made by the hedge funds industry. 0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
1,000
The breakdown of hedge funds of funds by manager location shows that around
Sources: IFSL estimates
a quarter of assets were managed from the UK. The US was the most popular
location with around 30% of the market. Switzerland, France and Hong Kong Chart 13 Single-manager hedge fund capital
were also important centres. To deal with the decline in assets many fund of
provided by funds of hedge funds
funds were forced to reduce management and performance fees in order to % share
of these listings are on the London and Zurich exchanges. The London Stock
35
Exchange overtook Zurich in 2006 to become the location of choice for funds
30
Secondary market for hedge funds is a market where investors can buy into
20
some hedge funds at a discount to net asset value. This is an OTC market where
15
each deal is individually priced and structured. The secondary hedge funds
10
market allows investors to sell stakes in funds that have lockups or have 5
limited redemptions. It also lets others into funds that aren't accepting new
investors. As record investor redemptions swept over the industry in late 2008
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
and restrictions on redemptions imposed by some hedge funds increased, many Sources: IFSL estimates
investors turned to the secondary market to try to sell their stakes. In December
2009, Hedgebay, one of the leading players in secondary market-making for
hedge funds, saw its global hedge funds secondary market index drop to a
Chart 14 Concentration of hedge fund
record low, to just under 80% of the average net asset value.
assets
% share, 2009
The hedge fund industry has become more concentrated at the top end over the
30%
past decade. With fund closures on the rise and new launches on the decline for
80
much of 2008 and 2009 consolidation intensified. The industry will probably
be characterised by a greater concentration of assets in the large funds in the
60 99%
next few years. The top 100 hedge funds accounted for around 70% of total
industry assets in 2009, up from 54% in 2003 (Chart 14). JP Morgan was the
40
70%
largest hedge fund with $50bn under management in January 2010 (Table 2). It
was followed by Bridgewater Associates $44bn and Paulson & Co $32bn. The
20
8% hedge fund attrition rate in 2009 was down on the previous year but much
higher than the 3% to 5% range seen over the previous 10 years (Chart 15).
0 1%
Funds Assets
Source: IFSL estimates
5
April 2010 Hedge Funds
operational support facilities (Chart 16). The bulk of prime brokers’ income
comes from cash lending to support leverage and stock lending to facilitate
10
short selling, both areas that have been affected to a large extent in 2008 and 8
services and accounts for more than 90% of its activity, as the largest
investment banks that provide these services are either headquartered or have
4
20% in 2008 (Table 3). According to the Financial Services Authority, the
hedge funds by prime brokers
2007 to nearly 40% in October 2009 (Chart 18). This is likely to drop in 2010
as liquidity continues to return to the industry. Hedge funds leverage increased
Securities lending 70%
to an average of around 1.50 in 2009 from 1.10 in 2008, almost back to levels
Cash lending 55%
administrative functions such as accounting, investor services or risk analysis Custody services 40%
varies widely. Assets under administration by third-party hedge fund Risk Management
administrators fell by around 2% in the first half of 2009 following a 30% fall Capital introduct.
30%
in 2008. Citco Fund Services retained its position as the largest hedge fund
25%
of 2009 to $340bn. It was followed by State Street Alternative Investment Source: Banking Supervision Comittee, ECB
0 10 20 30 40 50 60 70 80
Solutions and The Bank of New York Mellon (Table 4). There may be an
increase in the outsourcing of administrative functions in the coming years as
hedge funds will be looking to reassure their clients due to the fall in reputation
of the industry following the Madoff fraud and the
suspension of redemptions by a number of funds in the Chart 17 Structure of a typical hedge fund
latter part of 2008.
Managers of offshore hedge funds typically rely on offshore
Investors
6
April 2010 Hedge Funds
Custody Hedge fund assets are Table 3 Largest hedge fund prime brokers
generally held with a custodian,
Table 4 Largest hedge fund administrators
including cash in the fund as well Jan-2009 Jan-2008 end-June 2009 Growth from
custodians.
UBS 6.9 7.8 Goldman Sachs Admin. Services 156 -14
Deutsche Bank 6.6 5.9 Citi 129 -14
Some hedge funds however, may undergo annual audits if this is a part of the
contract between the hedge fund and its investors. This may however change if
regulation of hedge funds is tightened. Some offshore locations require hedge
funds to have their accounts audited.
The hedge fund industry has faced calls for stricter regulation in recent years.
% margin requirement
Although hedge funds did not play a major role in the emergence of the credit
45
established in April 2009 following the G-20 London summit. The oversight of 25
the new body was extended to all financial institutions important to global
financial stability including for the first time large hedge funds.
20
15
In the US, hedge fund managers have not been subject to regular SEC
10
the SEC in February 2006 that required hedge fund managers to register under
0
the Investment Advisers Act were overturned by the federal court in the same
Apr-05 Apr-06 Apr-07 Apr-08 Apr-09
Oct-05 Oct-06 Oct-07 Oct-08 Oct-09
year. Since then US hedge fund managers who registered with the SEC have
Sources: Financial Services Authority
in 2010 and if it passes it will move onto the Senate and eventually to the Gross market exposure as a
Domestic regulation of hedge funds varies across Europe. In April 2009, the
170
now being considered by both the European Parliament and the Council of
Ministers. The impetus for the Directive came from the G20 summit in London
140
which set the path for hedge fund regulation, with G20 leaders agreeing that
130
should report systemically relevant data to those regulators. While the industry, 110
led by the global hedge fund body AIMA, is supportive of those goals,
international concern has been expressed by the marketing provisions of the
100
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Directive which could effectively prevent non-EU funds and managers from
Source: Hennessee Group LLC, Financial Services Authority,
accessing the EU market and thus prevent EU investors from investing outside
IFSL estimates
7
April 2010 Hedge Funds
the EU. The Directive could be agreed this summer, although it would take
several years to implement. IFSL Research:
Report author: Marko Maslakovic
UK hedge fund managers and advisors are typically required to seek
authorisation from the Financial Services Authority (FSA). The regime for
Director of Economics: Duncan McKenzie
d.mckenzie@ifsl.org.uk +44 (0)20 7213 9124
hedge fund managers in the UK is similar to that which applies to other
Senior Economist: Marko Maslakovic
investment managers. They are able to take advantage of the Investment m.maslakovic@ifsl.org.uk +44 (0)20 7213 9123
Services Directive which allows them to offer their investment services to International Financial Services London
clients in other countries within the EEA. The FSA oversees a group of the 29-30 Cornhill, London, EC3V 3NF
largest hedge fund managers from within a specialist supervisory team. The www.ifsl.org.uk
FSA also specifies restrictions on sales and marketing of hedge fund ------------------------------------------------------
products. Hedge fund products for example, cannot be marketed to the International Financial Services London (IFSL) is a private
sector organisation, with nearly 40 years experience of
general public but UK investors can deal directly with offshore funds. successfully promoting the exports and expertise of UK-
based financial services industry throughout the world.
Offshore hedge funds are registered in tax neutral jurisdictions allowing
investors to minimise their tax liabilities. Offshore hedge funds are usually This report on Hedge Funds is one of 16 financial sector
reports in IFSL’s City Business Series. All IFSL’s reports can
structured as corporations although may sometimes be limited partnerships. be downloaded at www.ifsl.org.uk.
Generally the number of investors is not restricted. Onshore hedge funds
often set up a complementary offshore fund to attract additional capital © Copyright April 2010, IFSL
In partnership
with:
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