NEW YORK — Despite hype to the contrary, new research finds that hedge fund managers should have at least 30 years of comfortable growth and plenty of spare capacity now.
Citigroup Alternative Investments, New York, recently completed a study, "How Large Could the Hedge Fund Industry Grow? An Analysis of Equity Short Constraints and Industry Capacity." The study's authors are Ryan Meredith, vice president/senior research analyst, and Vineet Budraja, vice president research, at Citigroup Alternatives; Tanya S. Beder, chief executive officer of Tribeca Global Management LLC, a Citigroup subsidiary; and Rui de Figueiredo, associate professor at the Haas School of Business, University of California at Berkeley.
The study notes "the rapid growth of hedge funds as an asset class has inevitably created concerns about just how large the total market can become and whether capacity constraints in either the overall market or in an individual strategy can affect performance."
The Citigroup analysis focused on possible constraints in the market for short equity sales. "Because short sales are an important tool that many hedge fund managers use to capture value, understanding how constrained this instrument is, provides guidance regarding how large the total market can become," said the authors.
While the size of the short-selling market is finite and subject to supply and demand interplay, the Citigroup team also noted that hedge fund managers are not the only ones who short stocks. Other users include institutional investors, individuals and both flow and proprietary traders, who use shorting to speculate or to hedge trading exposures.
The researchers estimated the amount of current and future shorting by hedge fund managers in six equity strategies: convertible arbitrage, long-short, market-neutral, global macro and merger arbitrage. Using data from Hedge Fund Research Inc., Chicago, as of year-end 2004, the researchers calculated that assets under management in these strategies was $476 billion, that the average leverage of the invested capital is about 154%, and that the average level of short equity exposure in these six strategies is about $176 billion.