Asset gap widens as hedge funds of funds slide

The gap between the growing assets managed by large hedge fund managers and the dire declines of many hedge funds-of-funds firms widened into a chasm over the past year.

Aggregate assets of the 25 largest single and multistrategy hedge fund firms in Pensions & Investments' 2012 annual ranking grew 3.6% to $617.5 billion in the year ended June 30 from $596.1 billion a year earlier.

(View the complete special report, including data, at www.pionline.com/hedge.)

P&I's 2012 class of the largest hedge fund firms welcomed four new entrants, and a year-to-year comparison of the full universe showed much higher aggregate growth of 14.2% for the year ended June 30. The four firms are Davidson Kempner Capital Management LLC, with $19.5 billion under management; Lone Pine Capital LLC, $19.2 billion; Millennium Management LLC, $15.7 billion; and Viking Global Investors LP, $15.6 billion. Of these, Davidson Kempner and Lone Pine are new to P&I's full hedge fund universe.

By contrast, assets of the 25 largest hedge funds-of-funds managers, including three firms new to the ranking, in aggregate decreased 7% to $320.9 billion in the 12 months ended June 30 from $345.1 billion a year earlier.

A year-to-year comparison of the new universe of funds-of-funds firms showed a 6.6% decline in assets as of June 30, according to analysis of P&I data. Hedge funds-of-funds managers new to the top 25 are Aetos Alternatives Management LLC, with $8.7 billion; EnTrust Capital Inc., $7.5 billion; and Towers Watson Ltd., $7.3 billion. Of these, Towers Watson joined P&I's full hedge funds-of-funds universe for the first time in 2012.

Analysis of the data provide a telling glimpse into the drastically changed fortunes of many hedge funds-of-funds companies since the financial crisis of 2008.

In aggregate, worldwide assets managed by all hedge funds-of-funds managers declined 42% to $405.7 billion as of June 30 from the all-time high in rankings of $699.9 billion as of June 30, 2008.

On the other hand, assets of many hedge fund managers, both individually and in aggregate, rebounded far better after the 2008-2009 crash. P&I's 2012 survey deliberately targeted hedge funds that have attracted significant inflows from institutional investors over the past 12 to 18 months (P&I, Jan. 9).

By concentrating on adding new, institutionally oriented hedge funds, the number of firms on P&I's 2012 list more than doubled in size to 119 from 57 the previous year. Aggregate assets of P&I's hedge fund universe totaled $1.153 trillion as of June 30, an increase of 49.4% over the far smaller 2011 universe.

New hedge fund managers in P&I's universe include Black Diamond Capital Management LLC, Blue Ridge Capital LLC, Cevian Capital, Magnetar Investment Management LLC, Marshall Wace LLP, Pershing Square Capital Management LP, Taconic Capital Advisors LP and TPG-Axon Management LP.

For hedge fund managers that did not respond to P&I's survey, information about their 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 which predominantly manage hedge funds, especially credit specialists, may include non-hedge fund money within their discretionary assets.)

All hedge funds-of-funds managers included in P&I's 2012 ranking responded to the survey.

P&I has regularly surveyed hedge funds-of-funds managers since 2007 and hedge fund managers since 2011 about their assets under management.

Bridgewater Associates LLC managed the industry's largest hedge fund — $75.3 billion as of June 30 - for the second year in a row, with an asset growth of 27.8% compared to the same date the year before. Man Group PLC remained in second, with total hedge fund assets of $41.4 billion up 5.42% from the previous year. Brevan Howard Asset Management LP rode year-to-year asset growth of 18.4% to move into third place from fourth with total hedge fund assets of $36.7 billion.

Paulson & Co. Inc., which was the third largest hedge fund manager in 2011, dropped to 13th with total hedge fund assets of $21 billion in P&I's 2012 ranking. Paulson & Co. experienced the largest decline — 40.3% — among the 25 largest hedge fund managers for the year ended June 30.

Six of the 25 largest hedge fund managers experienced asset declines in the year ended June 30 ranging from Farallon Capital Management LLC's 1.49% decline to Paulson & Co.'s 40% drop.

Blackstone Alternative Asset Management retained first place among hedge funds of funds for the 12 months ended June 30, with assets of $41.4 billion, up 11.3% from the prior year. UBS Global Asset Management Alternative and Quantitative Investments held on to second place with assets of $25.6 billion, representing a decline of 17.1%. Goldman Sachs Asset Management's year-to-year asset growth of 10.3% to $22.5 billion pushed the firm to third place from fifth the prior year.

Just eight of the 25 largest hedge funds-of-funds firms in P&I's ranking experienced positive AUM growth as of June 30; 16 firms endured declines ranging from 0.38% to 55.6%; one firm was new to the overall ranking.

The largest hedge fund managers have institutional investors to thank to a great extent for the size of their war chests, said Peter Laurelli, vice president-research based in the New York office of money manager tracker eVestment Alliance LLC. Mr. Laurelli provided his analysis and comments in an e-mail response to questions.

The growing trend toward direct investment in single and multistrategy hedge funds by many large institutional investors — at the expense of hedge funds of funds in many cases — definitely is spotlighted by P&I's findings, Mr. Laurelli said.

According to analysis of the eVestment/HFN database, which tracks hedge funds and funds of funds, Mr. Laurelli noted in his e-mail that “the near flat net flows for the hedge fund space in the ... 12 months (ended June 30) is more likely due to a rotation of how assets are being allocated to the industry and less about lack of demand for exposure to hedge funds.”

“This has been a persistent trend since the financial crisis. Since the beginning of 2008 through (second quarter) 2012,” the percentage of total hedge fund industry assets invested in funds of funds declined to 35% from 49%, Mr. Laurelli added.

Institutional investors also are a big driver behind the consolidation of hedge fund industry assets to the largest firms, Mr. Laurelli said.

“The (P&I) survey results absolutely confirm the growing investor preference to allocate to the largest (hedge fund) firms with the most institutionalized operations,” Mr. Laurelli said.

A few clear winners emerged from among the pack of funds-of-funds managers, Mr. Laurelli said in his e-mail.

“It is interesting that the declines in the funds-of-funds space are not universal and that some large firms have received large, new allocations in the last 12 months. This is evidence that despite the broad shift in investor preference, funds of funds provide a valuable service and there is still demand, albeit diminished,” he said.