Hedge fund asset growth barely misses double digits for year

9.9% increase for top 25 firms helped by strong domestic, overseas markets

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Stephen L. Nesbitt said portfolios with 'higher-octane, higher-beta exposure' did the best for the year, with returns between 14% and 16%.

For hedge fund and funds-of-funds managers, 2013 was a better year than the last as asset growth for both types of firms was positive.

In aggregate, assets of the 25 largest single and multistrategy hedge fund managers in Pensions & Investments' annual survey of institutionally oriented hedge fund firms grew 9.9% to $658.5 billion in the 12 months ended June 30.

That's a healthy 630-basis-point increase over the growth rate the year earlier, when the restated assets of the top 25 hedge fund managers totaled $599 billion, up 3.6% from P&I's 2011 survey.

For the full universe of 132 companies managing at least $1 billion in hedge funds, aggregate assets grew 15.2% to $1.3 trillion in the year. That compares with a 14.2% rate of growth in the aggregate assets of the 119 hedge fund managers in the 2012 survey.

Year-to-year asset growth of institutionally oriented hedge funds-of-funds showed a remarkable turnaround into the black, compared with sharp declines the prior year.

Assets of the 25 largest hedge funds-of-funds managers were up 7.1% to $335.1 billion in the year ended June 30, according to P&I's survey.

See associated story: Hedge funds-of-funds managers in midst of metamorphosis

Total assets of the full universe of 48 managers with at least $1 billion managed in hedge funds of funds was up 7.2% to $403.4 billion.

For the year ended June 30, 2012, assets of the 25 largest hedge funds-of-funds managers declined 7% from the prior year, while aggregate assets of the full universe were down 6%.

The strong growth rates for both hedge funds and hedge funds of funds in P&I's universe were fueled to some extent by strong U.S. and international stock markets, observers said.

The Standard & Poor's 500 index was up 20.6% in the 12 months ended June 30, while the MSCIAll World Country index was up 17.3% for the same period.

By contrast, the HFRI (Hedge) Fund Weighted Composite index returned 7.9% and the HFRI (Hedge) Fund of Funds Composite, 7.27%.

“Overall, I would say that institutional investors who are investing directly in hedge funds were pretty happy during this period. It was a good year,” said Stephen L. Nesbitt, CEO of alternative consultant Cliffwater LLC, Marina del Rey, Calif.

12% average

Cliffwater researchers estimated the average institutional portfolio directly invested in hedge funds returned 12% in the year ended June 30, with between four and five percentage points contributed by “healthy alpha,” Mr. Nesbitt said.

He noted there was “a lot of range in return” for institutional hedge fund portfolios in the period, likely the result of the degree of customization and the degree to which hedge fund beta is dialed up or down.

Portfolios with less beta exposure likely were nearer the low end of the performance range with returns between 6% and 10%, while portfolios with “higher-octane, higher-beta exposure” ended up toward the top, with returns between 14% and 16%, Mr. Nesbitt said.

The five largest companies retained their spots, in the same order, on P&I's hedge fund ranking for the second year in a row.

Bridgewater Associates LP remained the number one manager with assets of $81.9 billion as of June 30, up 8.8% from the prior year. Man Group PLC followed with $40.3 billion, down 2.7% from the previous year. The next three firms in rank order were Brevan Howard Asset Management LLP, $39.7 billion, up 8.3%; BlueCrest Capital Management LP, $36.7 billion, up 18.1%; and Och-Ziff Management LP, $36.7 billion, up 22.2%.

Within P&I's list of the 25 biggest managers of hedge funds, other firms with year-to-year growth over 20% were Credit Suisse Asset Management, up 30.5% with assets of $24.6 billion; Viking Global Investors LP, up 29.6% to $20.2 billion; The Baupost Group LLC, up 21.3% to $28.1 billion; and York Capital Management Global Advisors LLC, up 20% to $15 billion.

Two outliers in the top 25 list show higher growth rates, but that stems from reporting differences between 2012 and 2013: Canyon Capital Advisors LLC's assets, up 58% to $22.6 billion, and Pacific Investment Management Co.'s assets rose 52.5% to $15.4 billion.

The three biggest losers on P&I's top 25, with double-digit asset declines, were J.P. Morgan Asset Management (JPM) where hedge fund assets dropped 23.6% to $22 billion; Paulson & Co. Inc., down 18.3% to $17.2 billion; and Winton Capital Management Ltd., down 15.5% to $24 billion.

For the 30 hedge fund managers that did not return P&I's survey, information about their net discretionary assets under management was gleaned from the brochure section of ADV forms filed with the Securities and Exchange Commission. (One caveat about using ADV information is that firms that predominantly manage hedge funds, especially credit specialists, may include non-hedge fund money within their net discretionary assets.)

Among the firms that responded fully to P&I's survey, just seven firms reported that they manage more than 90% of their hedge fund assets for pension funds, endowments, foundations, sovereign wealth funds and insurance companies.

Black River Asset Management LLC and Cheyne Capital International Ltd., which each manage 100% of their assets for institutions, top that list. Coincidentally, both managers ran $5.2 billion in hedge funds as of June 30.

Funds-of-funds leaders

All of the hedge funds-of-funds managers on P&I's ranking submitted their information via survey, led by Blackstone Alternative Asset Management, which managed $49 billion, up 18.4% in the year ended June 30. UBS Global Asset Management's $25.4 billion of hedge funds-of-funds assets followed, with a 0.5% decline from the previous year. The remaining managers on the top five list were Goldman Sachs Asset Management, up 3.4% to $23.3 billion; Grosvenor Capital Management LP, up 6.7% to $22.9 billion; and Permal Investment Management Services Ltd., up 16.9% to $20.9 billion.

Some of Permal's growth was the result of the March acquisition of Fauchier Partners LLC, which reported hedge funds of funds assets of $6.4 billion as of June 30, 2012. Permal reported assets of $17.9 billion on last year's P&I survey.

Seventh ranked Man Group PLC also showed high asset growth of 46.6% to $15.1 billion, but the growth was the result of the integration of FRM Holdings Ltd.'s assets after Man acquired the hedge funds-of-funds manager in July 2012.

Just two managers reported a higher growth rate of hedge funds-of-funds assets than Blackstone without the benefit of an acquisition to pump up their assets: Mercer Investments' assets grew 84.1% to $5.5 billion and Aetos Alternatives Management LLC's assets leapt 20.2% to $10.5 billion.

The three firms with the biggest asset losses in the year ended June 30 were Arden Asset Management LLC, which experienced a 24.7% decline in hedge funds-of-funds assets to $6.1 billion; Credit Suisse Asset Management, down 18.7% to $6.8 billion; and Lyxor Asset Management SA, down 14% to $9 billion.

Hedge funds-of-funds managers on P&I's ranking generally manage more of their assets for institutions than hedge fund firms do: 20 of the 48 managers on P&I's list reported that at least 90% of their assets are institutional.

This article originally appeared in the September 16, 2013 print issue as, "Asset growth barely misses double digits for year".