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More hedge fund firms seeing a decline in assets

Kenneth J. Heinz said investors are frustrated with performance.

58% of hedge fund managers report a drop; 63% of funds-of-fund firms also holding less

Updated with correction

IIn a sharp reversal of fortune, the majority of hedge funds and hedge funds of funds experienced asset declines ranging from slight to extreme in the year ended June 30.

The turnabout was dramatic: 59% of managers reported a decline in assets they managed worldwide in hedge funds compared with the year-earlier period, when 70% reported asset growth.

In response to Pensions & Investments' seventh annual hedge fund survey, only one quarter of the 118 hedge fund companies in the survey reported positive or flat hedge fund asset growth as of the end of June. The remaining 16%, or 19 firms, were new respondents.

Hedge funds-of-funds managers suffered similarly in the period: 61% of the 44 firms surveyed reported lower assets managed worldwide in hedge funds of funds and customized portfolios; 21% reported an increase; and the remaining 18% were new or merged with another firm during the past year.

By comparison, 55% of hedge funds-of-funds managers surveyed said assets rose as of June 30, 2015.

Despite the wide dispersion of individual firms' asset changes — which ranged from 65.6% to -80.1% (excluding year-to-year changes from recategorized assets) — aggregate assets managed in single and multistrategy hedge funds by the institutionally oriented firms surveyed by P&I rose 5.3% to $1.203trillion in the year ended June 30. Assets of the 25 largest hedge fund managers in the universe totaled $724 billion, 60% of the total.

Aggregate assets managed worldwide in hedge funds-of-funds portfolios, on the other hand, declined 5.2% to $418 billion in the yearlong period ended June 30. The 25 largest hedge funds-of-funds firms managed a total of $379 billion, 91% of the total. Changes in assets under management of hedge funds-of-funds managers (excluding year-to-year changes from recategorized assets and mergers) ranged from 34.7% to -35.4%.

A tough year

The wide dispersion of one-year returns as of June 30 of the managers in P&I's surveys reflects the battering managers took from difficult global markets and big redemptions.

On a year-to-year basis, hedge fund returns — like hedge fund manager AUM growth — flip-flopped along with the HFRI Fund Weighted Composite index, which fell 2.4% in the survey period, compared with a gain of 2.3% for the year ended June 30, 2015.

Although P&I analysis shows institutional investors are not the primary source of hedge fund redemptions in 2016 (P&I, May 2), industrywide outflows are reflected in the survey data, sources said.

The hedge fund industry (including hedge funds of funds) hemorrhaged a collective $17.3 billion in the quarter ended June 30 and $30.8 billion year-to-date, data from researcher eVestment LLC, Marietta, Ga., showed.

That's a huge difference from 2015, when eVestment reported that a net $69.3 billion flowed into hedge funds in the first two quarters and net inflows for the entire year were $44.1 billion.

Total hedge fund industry assets declined 4.1% to $2.995 trillion in the year ended June 30 from $3.122 billion as of the same period a year earlier, eVestment reported.

“What made redemptions from the industry in June different than all other months of 2016 was that it was the first month of 2016 when large funds that performed well in 2015 had aggregate redemptions,” said eVestment researchers in their second quarter 2016 data commentary, adding “this is an indication that as redemption pressures from poor 2015 performance appeared to abate in April and May, negative sentiment related to 2016 performance may be rising.”

Hedge fund investors are suffering from “pent-up frustration” about hedge fund performance, agreed Kenneth J. Heinz, president, Hedge Fund Research Inc., Chicago, the producer of the HFRI family of indexes.

Mr. Heinz stressed there is a marked absence of investors in 2016 who are trying to get into the latest hot hedge fund performer. “It's hard to rationalize performance chasing because there's nothing that's up enough to chase,” he said.

Instead, hedge fund redemptions have been on the rise because “in a year when spreads are so tight, there's a lot of rearranging of the deck chairs. Spreads are so tight that the smallest differences in performances — mere basis points — are magnified. Investors have no tolerance these days for a holding period longer than a week,” Mr. Heinz added.

The largest hedge fund managers
Ranked by discretionary assets managed in hedge funds worldwide, in millions, as of June 30, 2016.
RankManagerAssetsChange from 2015
1 Bridgewater Associates$102,930-0.7%
2AQR Capital Mgmt.$63,03038.2%
3Man Group$46,3004.3%
4Millennium Mgmt. $33,3029.5%
5Winton Capital Mgmt.$33,04510.9%
6 Renaissance Technologies$32,00018.5%
7The Baupost Group$29,200N/A
8Elliott Management$28,8347.6%
9 BlackRock (BLK)$28,600-14.3%
10Two Sigma Investments$27,60027.2%
11D.E. Shaw Group$27,0182.5%
12Och-Ziff Capital Mgmt.1$26,100-31.2%
13Davidson Kempner Capital Mgmt.$25,250-1.4%
15Marshall Wace2$23,00013.3%
16Farallon Capital Mgmt.$21,0001.9%
17Viking Global Investors$19,780-9.4%
18Brevan Howard Asset Mgmt.$19,400-28.1%
19King Street Capital Mgmt.$19,000-10.0%
20York Capital Mgmt.$18,300-15.7%
21Pacific Investment Mgmt.$16,9798.3%
22Anchorage Capital$15,600-1.3%
23Moore Capital$15,000-3.2%
24Canyon Partners$14,2000.0%
25Capula Investment Mgmt.$14,10015.6%
26BlueMountain Capital Mgmt.$14,099-5.7%
27Fortress Investment Group1$13,588-0.2%
28Magnetar Capital$13,200-7.7%
29Goldman Sachs Asset Mgmt.$13,000-14.5%
30Graham Capital Mgmt.$12,66627.4%
31Cevian Capital$12,619-11.8%
32The Children's Investment Fund $12,50013.6%
33Lone Pine Capital$12,400-3.9%
34Highfields Capital Mgmt.$12,200-1.6%
35Angelo Gordon & Co.$12,100N/A
37GoldenTree Asset Mgmt.$11,5552.2%
38Tudor Investment Corp.$11,000-17.9%
39PointState Capital$10,190-3.0%
41Nephila Capital$9,9836.4%
42Fir Tree Partners$9,600-26.6%
43Glenview Capital Mgmt.$9,460-19.6%
44Systematica Investments$9,400N/A
45 Ramius$9,082-1.3%
46Marathon Asset Mgmt.$8,700-10.3%
47Greenlight Capital$8,600-27.1%
48Eton Park$8,500-5.6%
49Senator Investment Group$8,485-6.1%
50Carlson Capital$8,354-14.8%
51Pine River Capital Mgmt.$8,100-14.7%
52Silver Point Capital$7,500-2.6%
53JANA Partners$7,435-37.0%
54MKP Capital Mgmt.$7,391-11.7%
55Blue Ridge Capital$7,000-12.5%
56J.P. Morgan Asset Mgmt.$6,446-77.3%
57Taconic Capital Advisors$6,190-25.7%
58Aspect Capital$5,904N/A
59Eminence Capital$5,900-7.8%
60Tiger Global Mgmt.$5,900N/A
61UBS O'Connor $5,6000.0%
62Ellington Mgmt. Group$5,300-3.6%
63Paloma Partners$5,30065.6%
64Solus Alternative Asset Mgmt.$5,039-2.6%
65PDT Partners$5,000N/A
66Samlyn Capital$5,000-9.1%
67Waterfall Asset Mgmt.$4,2000.3%
68DW Partners$4,100-21.2%
69 Gramercy Funds Mgmt.$3,95521.7%
70Passport Capital$3,9002.6%
71Tilden Park Capital Mgmt.$3,8623.5%
72Hutchin Hill Capital$3,700-9.8%
73Hitchwood Capital Mgmt.$3,68133.6%
74Aurelius Capital Mgmt.3$3,605-24.2%
75Autonomy Capital$3,500-2.8%
76Contrarian Capital Mgmt.$3,140-10.3%
77Blue Harbor Group$3,100-13.4%
78Tricadia Capital Mgmt.$3,100-24.4%
79Ivory Asset Mgmt.$2,991-1.0%
80Highline Capital Mgmt.$2,8566.1%
81Capstone Investment Advisors$2,732-20.0%
82Hudson Bay Capital Mgmt.$2,700-17.3%
83Ionic Capital Mgmt.$2,7008.0%
84LibreMax Capital$2,700-17.3%
85Garda Capital Partners$2,507N/A
86TIG Advisors$2,500N/A
87HG Vora$2,40014.3%
88Kepos Capital$2,2005.3%
89Structured Portfolio Mgmt.$2,120-20.5%
90Kingdon Capital Mgmt.$2,063-22.8%
91Acadian Asset Mgmt.$2,047N/A
92Conatus Capital Mgmt.$2,000-12.9%
93Napier Park Global Capital$1,881-2.0%
94Finisterre Capital$1,850-23.3%
95Salient Partners$1,781-57.6%
96Saba Capital$1,70013.3%
97Seer Capital Mgmt.$1,630-16.0%
98Three Bays Capital$1,600-11.1%
99Wexford Capital$1,600-20.0%
100Impala Asset Mgmt.$1,482-46.8%
101Artreaus Capital$1,400N/A
102Strategic Value Partners $1,400-6.7%
103Greywolf Capital Mgmt.$1,385-21.4%
104Brenner West Capital Partners$1,305-9.8%
105Perella Weinberg Partners$1,125-21.8%
106400 Capital Mgmt.$1,082-25.1%
107Highland Capital Mgmt.$1,061-11.8%
108Folger Hill$1,000-16.7%
109Governors Lane$1,000N/A
110Senvest Management$971N/A
111Claren Road Asset Mgmt.$836-80.1%
112New Providence Asset Mgmt.$815N/A
113Birch Grove Capital$79713.9%
114Quest Partners$624N/A
115Argentem Creek Partners$485N/A
116Bocage Capital$391N/A
117Armory Capital Group$226N/A
118Mellon Capital$168N/A
Notes: 1 Data are as of June 30, 2016, from company earnings report. 2 Data are as of April 30, 2016, from external source 3 Data are as of July 31, 2016, from survey.
Source: Pensions & Investments survey, unless otherwise noted

Top 3 dominate

Hedge fund redemptions did not, however, rearrange the order of the three largest hedge funds in P&I's survey:

  • Bridgewater Associates LP remained the top hedge fund manager with $102.9 billion under management in hedge funds worldwide as of June 30, down 0.7% from the prior year;
  • AQR Capital Management LLC's hedge fund assets grew 38.2% — the highest growth rate in P&I's top 25 hedge fund universe — to $63 billion to remain in the second spot; and
  • Man Group PLC's hedge fund assets rose a modest 4.3% to $46.3 billion to remain at No. 3.

J.P. Morgan Asset Management (JPM) divested its ownership of hedge fund units Highbridge Capital Management LLC and Gavea Investimentos LTDA and shed $22 billion from its hedge fund portfolio, confirmed Kristen Chambers, a JPMAM spokeswoman. With assets reduced 77.3% to $6.4 billion, JPMAM moved down to 55th from eighth in the ranking of all hedge fund managers by worldwide assets under management as of June 30.

Four hedge fund managers that were among the 25 largest hedge fund managers in 2015 are not on the list in 2016 because they did not return P&I's survey, which asks for net discretionary assets under management.

These firms were Appaloosa LP (No. 21); Pershing Square Capital Management LP (No. 22); Paulson & Co. Inc. (No. 23); and Third Point LLC (No. 24).

Those hedge fund managers and others that did not return P&I's survey this year are ranked separately by the assets they reported on their most recent Securities and Exchange Commission ADV filing, which allows latitude in how assets are reported. Many companies report only regulatory assets under management in their ADV Part 5 and Part 2A, which may include undisclosed leverage on hedge fund assets and non-hedge fund strategies.

Replacing managers disqualified from P&I's 2016 rank of the 25 largest hedge fund managers are newcomers:

  • The Baupost Group LLC, which is new to the survey, and ranked seventh with $29.2 billion;
  • Pacific Investment Management Co. rose to 20th from 27th, with $17 billion;
  • Anchorage Capital Group LLC moved to 21st from 26th, with $15.6 billion;
  • Moore Capital Management LP jumped to 22nd from 28th, with $15 billion;
  • Capula Investment Management LLP leapt to 24th from 40th thanks to a 15.6% increase in assets to $14.1 billion; and
  • BlueMountain Capital Management LLC rose to 25th, from 30th with AUM of $14.1 billion.

Aside from the AUM-sharing phobia that afflicted some hedge fund managers in 2016, the ranking of the 118 institutional hedge funds managers that returned surveys turned up few surprises, with three exceptions.

Visium Asset Management LP dropped off P&I's list after announcing in late June that the firm would close after employees were charged by federal authorities with fraud. In 2015, Visium ranked 63rd in P&I's survey with assets of $7.3 billion.

Claren Road Asset Management LLC's decline continued for a second consecutive year, with worldwide hedge fund AUM falling 80.1% to $836 million, placing the firm in the 111th ranking spot, down from 76th in 2015 when the company reported assets of $4.2 billion. Claren Road's AUM peaked at $8.5 billion as of Sept. 30, 2014, and has been falling steadily due to performance issues (P&I, Aug. 24, 2015).

Black River Asset Management LLC said in September 2015 that it would split into three employee-owned investment boutiques. Black River's two hedge fund spinouts — Argentem Creek Partners LLC and Garda Capital Management LP — both joined P&I's hedge fund ranks as independent companies. Argentem Creek entered P&I's hedge fund ranking at spot 115 with $485 million.

Garda Capital's debut was at 82 with worldwide hedge fund AUM of $2.5 billion.

Mergers and closures

There was a bit more drama among the 25 largest managers of worldwide hedge funds of funds as of June 30, providing further evidence of the evolving consolidation trend P&I has tracked for some years.

The largest managers of hedge funds of funds
Ranked by discretionary assets managed in hedge funds of funds and customized accounts, worldwide, in millions, as of June 30, 2016.
from 2015
1Blackstone Alternative Asset Mgmt.$68,6502.1%
2UBS Hedge Fund Solutions$34,254-0.8%
3Goldman Sachs Asset Mgmt.$27,429-6.2%
5Grosvenor Capital Mgmt. $24,900-9.0%
6 Morgan Stanley (MS) Investment Mgmt.$21,551N/A
7 BlackRock (BLK)$19,200-12.1%
8 J.P. Morgan Asset Management (JPM)$17,130-7.9%
9Man/FRM Group$11,9005.3%
10Mesirow Advanced Strategies$11,604-18.4%
11 Rock Creek Group $11,6006.4%
12Aetos Alternatives Mgmt.$10,270-6.1%
26KKR Prisma $10,200-2.9%
14 K2 Advisors$9,162-2.4%
15Willis Towers Watson$8,68634.7%
16Pacific Alternative Asset Mgmt.$8,667-10.1%
17Lighthouse Investment Partners$8,300-3.5%
18 SkyBridge Capital II$8,131-13.7%
19Lyxor Asset Mgmt.$7,300-5.2%
20 SEI Investments (SEIC) Mgmt.$6,90617.1%
21 Strategic Investment Group$6,024-6.1%
22Silver Creek Capital Mgmt.$5,73111.5%
23 Mercer$5,1537.9%
24Evanston Capital Mgmt.$4,972-10.2%
25ABS Investment Mgmt.$4,701N/A
13Aberdeen Asset Mgmt.$4,351-20.6%
27 Corbin Capital Partners$4,243-15.6%
28Magnitude Capital$3,7841.5%
30Private Advisers$2,995-19.2%
31BNY Mellon$2,929-15.1%
3250 South Capital Advisors$2,736110.1%
33 Crestline Investors $2,700-53.0%
34 Commonfund$1,878-1.6%
36Mariner Investment Group$1,688N/A
37 Russell Investments$1,561-0.3%
38Maverick Capital$1,550-15.8%
39TeamCo Advisers$1,300N/A
40Blue Rock Advisors$964-10.1%
41Berens Capital Mgmt.*$984N/A
42 Meridian Capital Partners$434-25.2%
43Appomattox Advisory*$219N/A
44FQS Capital Partners$110N/A
*SEC ADV assets as of Dec. 31, 2015.
Source: Pensions & Investments survey, unless noted

The biggest splash among the 25 largest managers of worldwide hedge funds of funds and customized accounts — in terms of AUM and ascension in the P&I ranking — was the merger of Permal Group, which ranked No. 7 in 2015 with $18.8 billion, into EnTrust Capital Management LP, which managed $12.5 billion at No. 9.

The new EnTrustPermal Management LLC nudged longtime incumbent Grosvenor Capital Management LP out of fourth place with combined assets of $26.3 billion. Grosvenor's assets declined 9% to $24.9 billion for the fifth spot.

The closure of Aurora Investment Management LLC earlier this year after its failure to find a buyer (P&I, April 25) caused a stir within the institutional investment management industry. Aurora ranked No. 19 on P&I's 2015 hedge funds-of-funds chart with assets of $7.7 billion, which were reported from the firm's ADV because the firm would not provide its worldwide assets managed in hedge funds of funds.

Aberdeen Asset Management Inc.'s 2015 acquisition of hedge funds-of-funds manager Arden Asset Management LLC also caused industry tongues to wag. At the time of the merger in 2015, Arden managed about $5.5 billion worldwide in discretionary hedge funds of funds and Aberdeen managed about $1 billion. Aberdeen did not participate in the previous P&I survey. The combined hedge fund teams managed about $4.4 billion as June 30, down 20.8% from the $5.5 billion Arden reported the previous year.

What hasn't changed on the 2016 ranking of the largest managers of assets managed worldwide in hedge funds of funds and customized portfolios are the three chart dominators.

Blackstone Alternative Asset Management once again was industry's largest hedge funds-of-funds/ customized portfolio manager with a 2.1% AUM increase in assets to $68.7 billion as of June 30, more than double the assets of its nearest rival. UBS Hedge Fund Solutions retained the second place position with assets of $34.3 billion, a 0.8% decline from the previous year. Goldman Sachs Asset Management experienced a 6.2% decline in its worldwide hedge funds-of-funds assets to $27.4 billion, but remained in third place.

Morgan Stanley (MS) Investment Management, which did not return a survey in 2015, was back in 2016 with $21.6 billion managed worldwide in hedge funds of funds to take the sixth spot.

Other newcomers to P&I's top 25 list are Silver Creek Capital Management LLC, which rose to 23rd from 27th with an asset gain of 11.5% to $5.7 billion, and Mercer Investments, which moved up to No. 24 from 31st with a 7.9% increase to $5.2 billion.

The creation of EnTrustPermal was driven by a need to obtain scale as well as to combine the different hedge fund portfolio construction skills of each company, said Gregg S. Hymowitz, chairman and CEO. “Scale gives you more leverage with underlying hedge fund managers in terms of obtaining capacity and achieving lower fees,” he said.

Permal brought a strong suite of separate, customized hedge fund-of-funds portfolio skills to the mix while EnTrust contributed a growing program of co-investment with hedge fund managers.

Each firm brought its own roster of favorite hedge funds, which totaled 150, but that will be trimmed to 75, Mt. Hymowitz said.

Hedge funds-of-funds managers have to “evolve or evaporate,” Mr. Hymowitz stressed, noting there's a danger that investment consultants that manage discretionary assets might disintermediate hedge fund specialists from their investors.

“The way to counter that,” he said, “is to offer specialized, unique, niche-y strategies that hedge funds-of-funds managers are in a good position to create.”

This article originally appeared in the September 19, 2016 print issue as, "More firms seeing a decline in assets".