Hedge fund assets rise, but some managers are getting more

The majority of hedge fund and hedge funds-of-funds managers saw an increase in their assets in the year ended June 30, but there was wide dispersion between the best and worst firms and between hedge fund and hedge funds-of-funds managers.

Significantly more hedge fund managers — 70% — reported their assets managed worldwide grew in a year-to-year comparison than did hedge funds-of-funds managers, data from Pensions & Investments' annual survey showed. By contrast, only 55% of hedge funds-of-funds managers said their assets rose during the year ended June 30.

Assets managed worldwide by the 128 institutionally oriented, single and multistrategy hedge fund managers that participated in Pensions & Investments' annual survey totaled $1.35 trillion as of June 30. Assets of the 25 largest hedge fund managers in the P&I universe totaled $730.5 billion, about 54% of total assets of those surveyed.

A comparison to P&I's 2014 and earlier hedge fund special report totals is not possible because of a change in methodology, which ranked companies that responded to P&I's survey separately from companies for which data was taken from Securities and Exchange Commission Investment Advisor Disclosure Form ADVs.

P&I's 2015 hedge fund ranking is based on net discretionary assets managed in hedge funds worldwide. No changes were made to the hedge funds-of-funds manager rankings because all but one manager — Aurora Investment Management LLC — returned this year's survey.

Institutional investors continue to favor large, institutional hedge fund managers, said Peter Laurelli, a New York-based vice president and head of research for industry performance database provider eVestment LLC.

“A lot of money went into big multistrategy hedge funds and global macro/managed futures funds throughout the first half of 2015,” Mr. Laurelli said.

For example, according to survey data provided in both 2015 and 2014, multistrategy manager Millennium Management LLC moved up to sixth place from 16th with growth of 31.3% to $30.4 billion, and managed futures specialist Winton Capital Management Ltd. was pushed up to the seventh spot from 13th with growth of 21.3% to $29.8 billion.

Assets managed in hedge funds-of-funds worldwide as of June 30 totaled $441.2 billion, up 0.2% from the prior year. Assets managed by the 25 largest funds-of-funds managers rose 4.7% to $381.1 billion, or 86.4% of the total.

Institutional investors' collective evolution to direct investments in hedge funds has continued to be a drain on hedge funds-of-funds assets, P&I data show.

In the approximately seven years since the financial crisis, hedge funds-of-funds assets managed worldwide have declined 37% from the universe's peak of $699.9 billion as of June 30, 2008, P&I's historic survey data showed.

“Many investors are skeptical of hedge funds-of-funds,” said Douglas A. Smith, senior investment consultant, hedge fund manager research, who is based in the New York office of Towers Watson & Co.

Mr. Smith noted that “in a low-return environment, it's hard to justify hedge funds-of-funds fees on top of paying fees for the underlying hedge fund managers.”

Those investors who are allocating to hedge funds of funds are creating a definitive “bifurcation between winners and losers,” Mr. Smith said, evidenced by how much of the industry is run by the largest managers.

Narrowing the focus to the 98 institutionally oriented, single and multistrategy hedge fund managers that participated in P&I's annual survey this year and last, more than half of the 69 firms that experienced asset growth for the year ended June 30, or 55%, saw increases of at least 15%. Of the 28 hedge fund managers in P&I's universe that reported a decline in their assets for the 12-month period, 25% experienced declines of 15% or more.

Firms managing hedge funds reported to P&I a very broad range of growth rates in the year ended June 30 from 86.9% to -70%.

Some of the fastest-growing hedge fund firms were near the smaller end of P&I's ranking of managers by assets under management, including 400 Capital Management LLC, with asset growth of 86.9% to $1.4 billion; Neuberger Berman LLC, also with growth of 86.9% to $1.1 billion; Tilden Park Capital Management LP, up 85.7% to $3.7 billion; Waterfall Asset Management LLC, up 82% to $4.2 billion; and Hutchin Hill Capital LP, up 78.3% to $4.1 billion.

Exhibiting a more modest growth rate for the year ended June 30, Bridgewater Associates LP retained the No. 1 position by worldwide hedge fund assets under management in P&I's ranking with a gain of 13.6% to $103.6 billion. AQR Capital Management LLC grew by 44.3% to $45.6 billion, popping the firm up to the second spot from sixth in the prior year. AQR displaced Man Group which dropped to third place with $44.4 billion, up 6.5% from the prior year.

Two Sigma Investments LLC jumped into the ranks of the 25 largest hedge fund firms for the first time in 2015, experiencing the highest growth rate among the big managers for the year ended June 30 — 59.6% — to $21.7 billion.

Other new entrants to the P&I top 25 list were Pershing Square Capital Management LP, which rose to 22nd place from 27th with assets up 21.8% to $18.5 billion (2014 assets were from the firm's ADV), and Third Point LLC, up 20.3% to $17.8 billion and the 24th spot from the 34th the prior year.

Paulson & Co. Inc. was the only manager on P&I's 2015 top 25 hedge fund manager list to experience a significant decline in assets — 20% to $18.3 billion — that was performance-related. Paulson & Co. dropped to the 23rd place from 17th as a result.

Brevan Howard Asset Management LLP experienced a 25% decline in assets to $27 billion related to the spinout of DW Partners LP in January, moving the firm down to ninth place from third.

BlueCrest Capital Management (UK) LLP had a 70% reduction in assets to $9 billion after spinning out Systematica Investments Ltd. in January, dropping the firm to 57th place from seventh.

Baupost Group LLC was moved out of P&I's traditional ranking, where it ranked eighth based on its ADV assets of $29.9 billion as of Dec. 31, 2013.

Lone Pine Capital LLC moved down to the 38th position after reporting net discretionary assets of $12.9 billion to P&I.

In 2014, Lone Pine occupied the ninth place in P&I's ranking based on the Dec. 31, 2013, regulatory assets of $27.2 billion the firm provided in its SEC ADV filing for that year.

The difference in the size of Lone Pine's regulatory vs. its net discretionary assets is one example of the lack of clarity inherent in trying to compare money managers' assets as reported on the SEC's ADV form.

The SEC allows managers latitude in how they report their assets on the Investment Adviser Disclosure ADV form. Many companies report only regulatory assets under management in their ADV Part 5 and Part 2A, which may include undisclosed leverage on hedge funds assets and non-hedge fund strategies.

It was because of an increase in the inconsistency with which hedge fund managers report their data to the SEC that P&I changed the way it has ranked institutionally focused hedge funds for the last five years. There now are two rankings: one for managers that provided company information in P&I's annual survey and one for those firms that did not cooperate and for which asset data were culled from SEC ADV forms.

In 2015, 128 managers, including 24 new to P&I's rankings, returned surveys. Data from ADV filings was collected for 42 hedge fund managers.

The three largest hedge fund managers ranked by regulatory assets from their respective ADV filings were:

• Tiger Global Management LLC with reported regulatory and regulatory discretionary assets of $35 billion (ADV Part 5) and discretionary assets of $25.6 billion (ADV Part 2A) as of Jan. 1;

• GSO Capital Partners LP with reported regulatory assets of $33.2 billion and regulatory discretionary assets of $27.7 billion (ADV Part 5) as well as discretionary assets of $27.7 billion (ADV Part 2A) as of Dec. 31;

• Lansdowne Partners (UK) LLP with reported regulatory and regulatory discretionary assets of $32.4 billion (ADV Part 5) and discretionary assets of $17.2 billion (ADV Part 2A) as of Dec. 31.

Hedge fund managers turned in “a mixed bag of returns. There really weren't any remarkable outliers,” said Kenneth J. Heinz, president of data provider Hedge Fund Research Inc., Chicago, noting much of the year ended June 30 was “a repeat of the past five years of bull equity markets.”

The 2.3% return of the HFRI Hedge Fund Weighted Composite index for the year ended June 30 doesn't reflect the dispersion within his mixed bag of returns, Mr. Heinz said, noting that the hedge fund industry hit a new peak of $2.9 trillion in assets under management as of June 30 through a combination of fairly good performance overall and strong net inflows.

The return of the HFRI Fund of Funds Composite index of 3.96% for the year ended June 30 was a notable 163 basis points higher than HFR's broadest hedge fund index.

Hedge Fund Research produces the HFRI indexes.

By comparison, for the year ended June 30, returns for major market indexes were Standard & Poor's, 7.4%; MSCI ex-U.S., 6.9% (local currency); MSCI Emerging Markets, 3.6% (local currency); and Barclays U.S. Aggregate Bond, 1.9%.

The phenomenon of a few small companies exhibiting higher growth in assets managed worldwide in the year ended June 30 than much larger peers also was true for P&I's hedge funds-of-funds universe.

Neuberger Berman led P&I's hedge funds-of-funds manager universe in terms of asset growth, up 50.9% to $3.5 billion, followed by Russell Investments which rose 22.8% to $1.6 billion over the one-year period ended June 30. SkyBridge Capital II LLC, which ranked near the bottom of P&I's 2014 largest hedge funds of funds at 21st place was bumped up closer to the middle of the pack to the 16th spot with growth of 22.4% to $9.4 billion.

As in 2014, the top three positions based on assets under management on the 2015 P&I hedge funds-of-funds table continued to be held by the same three mega managers: Blackstone Alternative Asset Management remained firmly in first place with $67.3 billion on growth of 12.8% in the year ended June 30. In second place, managing just over half the amount of hedge funds of funds that Blackstone did was UBS Hedge Fund Solutions with $34.5 billion, up 11.7% over the previous year. Goldman Sachs Asset Management again ranked third with $29.2 billion on growth of 5.9% over the year.

Managers among the 25 largest hedge funds-of-funds companies that experienced the worst asset declines were Lyxor Asset Management, which dropped 18.9% to $7.7 billion over the year ended June 30, and Aurora Investment Management.

Aurora declined to respond to P&I's request for information. The firm's most recent ADV said net discretionary assets as of March 31 were $7.7 billion, down 15.5% compared with the June 30, 2014, data the firm provided for the prior year's survey.

Of the 19 hedge funds-of-funds managers in the survey universe that reported asset declines in the year ended June 30, 50 South Capital Advisors LLC (formerly a unit of Northern Trust Asset Management) experienced the largest fall — 39.8% — to $1.3 billion.

Sharp declines also were suffered by Investcorp Investment Advisers LLC, down 32.5% to $1.9 billion; Mercer Investment Management Inc., down 27.1% to $4.8 billion; and Amundi Alternative Investments, down 26.2% to $4.8 billion.