Hedge fund assets up 15% on big inflows, strong returns

A combination of solid performance and broad-based inflows pushed asset growth of hedge fund and hedge funds-of-funds managers well into positive territory for the second consecutive year.

Assets of the full universe of 159 institutionally oriented, single and multistrategy hedge fund managers increased 15.4% to $1.5 trillion in the 12 months ended June 30, Pensions & Investments' annual survey showed. That compares with 15.2% for 132 managers in the 2013 survey.

Assets of the 25 largest hedge fund managers totaled $715 billion as of June 30, up 8.6% from a year earlier. That growth rate was lower than the 9.9% for the year ended June 30, 2013, but well above the 3.6% pace for the same date in 2012, P&I data showed.

The 25 largest hedge fund managers managed 46% of P&I's total hedge fund universe, compared with 51% in 2013.

The same hedge fund firms held the top three positions in P&I's June 30 ranking for the third year:

• Bridgewater Associates LP, up 11.4% to $91.2 billion;
• Man Group PLC, up 3.5% to $41.7 billion; and
• Brevan Howard Asset Management LLP, down 9.4% to $36 billion as of Jan. 31, the most recent date for which assets were available from public sources. Brevan Howard did not respond to P&I's survey requests.

Aggregate assets of P&I's hedge funds-of-funds survey universe experienced a 9.3% growth spurt to $441 billion as of June 30, representing a 210-basis-point increase from the 7.2% increase in 2013 and a big improvement on the 6% decline in assets revealed in the 2012 survey. There were 50 managers in the 2014 survey and 48 in 2013.

The 25 largest hedge funds-of-funds managers ran a collective $364 billion in commingled, separate account and customized strategies as of June 30, up 8.6% from the prior year and higher than the 7.1% 2013 growth rate, and much better than the 7% decline the group experienced in 2012.

The 25 largest hedge funds-of-funds firms control 83% of the assets of the total survey universe.

As with the hedge funds, the same three hedge funds-of-funds companies held the top spots for the third year running:

• Blackstone Alternative Asset Management, up 21.6% to $59.6 billion;
• A&Q Hedge Fund Solutions (UBS), up 21.4% to $30.9 billion; and
• Goldman Sachs Asset Management, up 18.7% to $27.6 billion.

Hedge fund and funds-of-funds managers running less than $1 billion were included in the 2014 survey for the first time. For hedge funds, the nine managers with assets of less than $1 billion each accounted for $6 billion of aggregate assets, and the four smaller hedge funds-of-funds managers contributed a total of $3.5 billion to the universe.

Sources said performance — with acceleration contributed by red-hot domestic and international equity market returns — was a big factor in the growth of both hedge fund and funds-of-funds managers.

For the one-year period ended June 30, the HFRI Hedge Fund Weighted Composite returned 9.1%; HFRI Hedge Fund of Funds Composite, 7.6%; S&P 500, 24.6%; MSCI All Country World, 23.7%; and Barclays Capital U.S. Aggregate Bond, 4.4%.

Industry data for the four quarters ended June 30 from researcher eVestment LLC, for example, showed that for all hedge funds — a much larger universe than the one on which P&I's survey is concentrated — the increase in assets compared to the prior year was $367 billion. Of that, 57% was attributable to performance and 43% was from net investor inflows.

Hedge fund managers, especially the institutionally oriented companies in P&I's survey pool, continued to benefit from two favorable macro factors: the cessation of the “at-your-back tailwind that fixed-income returns provided to institutional investors” and the “frothy” global equity markets, said Kevin P. Quirk, co-founder and partner of specialist money management consultant Casey, Quirk & Associates LLC, Darien, Conn.

“Investors are turning to high-quality credit and fixed-income hedge funds as an alternative to traditional fixed income” and to long/short equity, short sellers and other non-correlated strategies as an antidote to the frothiness of equity markets and to provide downside protection, Mr. Quirk said.

For hedge funds of funds, on the other hand, the vast majority — 94% — of the $71 billion increase in total assets for the year ended June 30 was from performance, with the balance coming from net investor inflows, showed data prepared for P&I by eVestment.

While “net inflows to hedge funds-of-funds managers were very small compared to those for hedge funds in the year ended June 30,” the second half of the 12-month period showed investors were beginning to invest again in hedge funds of funds, said Peter Laurelli, eVestment's New York-based vice president and head of research.

Net inflows to eVestment's universe of hedge funds of funds — again, one that is much larger than P&I's institutionally focused pool — were down $5.8 billion and down $5.4 billion, respectively, from the third and fourth quarters of 2013. The first quarter of 2014 saw net inflows of $13.6 billion, while second-quarter net flows were $82 million.

“We have just exited a long stretch of redemptions for hedge funds of funds, but these managers are beginning to see a turnaround,” Mr. Laurelli said.

P&I's ranking of the 25 largest hedge fund managers by their total worldwide assets under management as of June 30 experienced a fair amount of shuffling compared to 2013.

Sources said one explanation for the shifts include cyclical performance declines for out-of-favor investment strategies, such as global macro and managed futures, which accounts for Brevan Howard's 9.4% decline, and the decline at BlueCrest Capital Management LP, where assets fell 18.3% to $30 billion, dropping the firm to seventh place from fourth. Managed futures specialist Winton Capital Management Ltd. experienced a 2.5% increase to $24.6 billion as of June 30, an improvement to the 15.5% loss the firm experienced in the year ended June 30, 2013, P&I data showed. Despite Winton Capital's increase in assets, the firm dropped to 13th from 10th.

Also experiencing an asset decline for the year ended June 30 was Och-Ziff Capital Management Group LLC, which was down 7% to $34 billion and retained the fifth position in the ranking.

Among the hedge fund firms that experienced asset growth greater than 30% in the year ended June 30 and moved up in P&I's ranking were:

• AQR Capital Management LLC, to sixth place from ninth with 30.6% growth to $31.6 billion;
• Paulson & Co. Inc., to 17th place from 22nd with 33.4% growth to $22.9 billion;
• York Capital Management Global Advisors LLC. to 19th from 24th with 44% growth to $21.6 billion;
• Citadel LLC, to 20th place from 25th with 42.9% growth to $21 billion as of July 1; and
• Appaloosa Management LP to 24th place from 27th with 39% growth to $20 billion.

Some hedge managers were so successful that they opted to close some of their funds because of capacity constraints.

AQR, Greenwich, Conn., enjoyed “very balanced growth across all of our hedge fund strategies as well as in long-only funds,” so much so that in the case of hedge funds, the firm has closed a number to new investors, said David G. Kabiller, founding principal.

In addition to renewed institutional investment in AQR's managed futures strategy, Mr. Kabiller said one of the firm's newer strategies, employed in the AQR Style Premia Fund, is attracting a fair amount of investment. The strategy is market and beta neutral, making long/short investments across all asset classes, giving the investor “pure exposure to all factors without market influence,” he added.

Aggregate assets managed by Chicago-based Citadel were at their highest level ever as of June 30. Most of its hedge funds are closed to new investors except for strategic investments accepted from sovereign wealth funds, said a source with knowledge of the firm's growth who requested anonymity. The source noted Citadel has become more institutional in recent years, counting 12 of the 15 largest sovereign wealth funds among its clients.

Citadel spokeswoman Katie Spring declined to comment. Citadel did not respond to P&I's survey request for the percentage of assets managed for institutions as of June 30.

Among hedge fund firms that did disclose the proportion of assets managed for institutional investors as of June 30, just three answered with 100%: Bridgewater Associates, Black River Asset Management LLC, $6 billion, and Premium Point Investments LP, with $940 million.

For 41 hedge fund companies 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 SEC. (One caveat about using ADV information is that firms that predominately manage hedge funds, especially credit hedge funds, might include non-hedge fund money within their net discretionary assets).

Absent from the top 25 hedge fund manager ranking is Credit Suisse Asset Management, which reported $24.6 billion in hedge fund assets as of June 30, 2013, and $6.8 billion in hedge funds-of-funds assets. The firm did not respond to P&I's repeated efforts to obtain asset figures, and the information was not found in public sources.

Also absent from the 2014 ranking of the 25 largest hedge funds-of-funds managers was UBP Asset Management LLC, with $10.8 billion under management last year. UBP did not respond to P&I's survey and reliable public information sources were not found.

There were fewer dramatic shifts of position on P&I's 2014 hedge funds-of-funds manager list.

Only one, SkyBridge Capital II LLC, saw growth of more than 30%, reporting assets of $7.7 billion, up 57.4% from the prior year. That was good enough to move the New York-based firm into the 25 largest hedge funds of funds for the first time, to the 21st spot from 29th.

After hitting its three-year anniversary last year, SkyBridge's dynamically managed hedge fund-of-funds portfolio continued to experience broad-based growth, moving further away from its initial mass affluent client base to an increasingly institutional clientele, mostly from Asia, said Raymond T. Nolte, co-managing partner, chief investment officer and portfolio manager.

“Our investment team has a total of nine years of experience in managing this type of portfolio, and it seems like people are really embracing the dynamic allocation model,” Mr. Nolte said.

Mr. Nolte noted that both existing and potential investor response was favorable when, after a strong 2013 investment year, the SkyBridge team started to derisk the portfolio in the second quarter this year.

Other new entrants to the top 25 hedge funds-of-funds list were AllianceBernstein LP, which came in at No. 19 with $8.5 billion, and Amundi Alternative Investments, which popped into P&I's ranking at No. 23 with $6.5 billion.

Like SkyBridge, Goldman Sachs Asset Management, New York, also saw broad-based asset growth in its hedge funds of funds from “all sizes, all geographies and all types of institutional investors,” said Kent Clark, managing director and chief investment officer of hedge fund strategies.

GSAM saw an 18.5% increase in its hedge funds of funds for the year ended June 30, with many existing and new investors coming to the firm for assistance in restructuring their hedge funds-of-funds portfolios, often using customized approaches, or to increase their total hedge funds-of-funds investment, which is “indicative of the natural evolution within the hedge fund industry,” Mr. Clark said.