Aggregate assets fall after previous 3 years of growth

Hedge fund managers with an institutional orientation experienced aggregate net asset declines in the year ended June 30 after three prior years of net growth.

Aggregate assets managed worldwide in single and multistrategy hedge funds totaled $1.3 trillion as of June 30, down 2.7% compared with the same date a year earlier, according to an analysis of survey data submitted by 111 firms for Pensions & Investments' 10th annual hedge fund special report.

By comparison, net aggregate asset growth of worldwide hedge fund assets in the year ended June 30, 2018, was exceptionally strong — 18.3% — and was preceded by positive net growth of 3.1% in the year ended June 30, 2017, and 5.3% as of the same date in 2016.

Aggregate assets under management worldwide by hedge fund managers that participated in both the 2018 and 2019 surveys fell 0.9% to $1.2 trillion.

Industry observers said net outflows and performance were significant contributing factors to AUM declines for many hedge fund managers in the year ended June 30.

Net redemptions from the hedge industry totaling $44.6 billion in the first half of 2019 by all types of investors took a toll on assets under management, data from eVestment LLC, Marietta, Ga., showed.

About 62% — $27.8 billion — of net outflows during the six-month period occurred in the second quarter. That total was more than twice the previous second-quarter peak net redemption of $13.5 billion (second quarter 2016) over the 10-year period ended June 30, eVestment researchers said in a report.

In contrast, net outflows in all of 2018 were $37.2 billion, according to eVestment.

Tough market conditions in the fourth quarter last year hit many hedge fund managers hard, impacting performance for the full 12-month period ended June 30, said Kenneth J. Heinz, president of Hedge Fund Research Inc., Chicago, which manages the HFRI indexes.

In the quarter ended Dec. 31, the HFRI Fund Weighted Composite index was down 6% and the HFRI Asset Weighted Composite index declined 2.4%.

In the year ended June 30, the HFRI Fund Weighted Composite index was up 1.3% and the HFRI Asset Weighted Composite index was up 2.7%, in contrast to the one-year returns of the indexes as of June 30, 2018, of 5.7% and 5.3%, respectively. "The fourth quarter, especially in December, was a reminder to investors who were (previously) happy with their long-only equity that hedge fund strategies like global macro and relative value arbitrage are needed in their portfolios," Mr. Heinz said.

The fallout from performance challenges and net outflows for hedge fund managers was an elevated number of firms with asset declines in the year ended June 30.

For the third year in a row, more hedge fund managers reported growth in assets than declines or flat levels in the year ended June 30, but just barely.

Within P&I's universe, 40% of hedge fund managers reported gains in worldwide assets under management while 39% experienced declines and 4% were flat. About 17% of the firms were new to the survey or comparative data were not available.

The percentage of hedge fund managers that suffered AUM declines in the year ended June 30 was 13 percentage points higher than the 26% of firms reporting losses as of the same date a year earlier.

The span of gains and losses among individual hedge fund managers was wide.

Credit hedge fund specialist Birch Grove Capital LP, New York, produced the largest gain — 69.4% to $1.6 billion — in assets managed worldwide in hedge funds in the year ended June 30.

New York-based Greenlight Capital Inc. suffered the largest decline in the year, down $3 billion, or 54.5%, to $2.5 billion.

Hedge funds-of-funds managers experienced a larger net decline in aggregate assets under management worldwide than hedge fund managers, with a decline of 4.5% to $321.9 billion in the 12 months ended June 30. As of the same date a year earlier, hedge funds of funds produced a 6.2% gain in net aggregate assets.

Two of the largest hedge funds-of-funds managers, Blackstone Alternative Asset Management and EnTrust Global, both based in New York, declined to break out assets managed worldwide in hedge funds of funds in response to P&I's survey and were not included in the 2019 ranking.

Aggregate assets managed worldwide in hedge funds of funds as of June 30, 2018, were restated to $337.1 billion, removing the $77.4 billion reported by BAAM and the $20.7 billion EnTrust reported for the date. BAAM and EnTrust ranked first and seventh, respectively, in P&I's June 30, 2018, ranking of hedge funds-of-funds managers.

Of the 26 hedge funds-of-funds managers in P&I's universe, 13 firms suffered declined in assets managed worldwide in the year ended June 30, 12 had positive growth, and one was new to the list.

Willis Towers Watson PLC produced the highest growth of 16.5%, to $14.8 billion among hedge funds-of-funds managers.

PAAMCO Prisma LLC, Irvine, Calif., experienced the largest AUM decline for the second year in a row, dropping 17.3% to $9.4 billion among hedge funds-of-funds managers.

Anne-Gaelle Carlton, managing director, partner and head of client partnerships at PAAMCO Prisma, said in an interview that the firm's AUM decline reflects the general state of the hedge funds-of-funds industry, noting "the hedge funds-of-funds industry is struggling to compete given the propensity by asset owners to invest directly in hedge funds."

The firm also was placed on many consultants' and institutional investors' watchlists for two years after the merger of Pacific Alternative Asset Co. and Prisma KKR by KKR & Co. in 2017, followed by the departures in 2018 of Girish Reddy and Jane Buchan, co-CEOs of the firm (P&I, July 17, 2018).

"We're beginning to see a thaw," Ms. Carlton said.

By way of coping with industry trends, PAAMCO Prisma has diversified its business to include a large advisory business — $13.1 billion — that assists asset owners in building portfolios of direct investment in hedge funds.

The firm also manages $1.3 billion internally in co-investment funds and long-only emerging market strategies.

Among continuing trends supported by the survey data is the asset concentration among the largest managers of both hedge funds and funds of funds, industry observers said.

About 66%, or $861 billion, of total worldwide hedge fund assets managed by P&I's universe were controlled by the 25 largest managers and 41% was managed by the 10 top firms, data showed.

Seven of the 10 largest hedge fund managers had asset increases in the year, led by Renaissance Technologies LLC, New York, which enjoyed asset growth of 19.3% to $68 billion.

The largest decline in assets managed by a top 10 hedge fund manager was the 27.3% drop to $60.8 billion by AQR Capital Management LLC, Greenwich, Conn.

Claudia Gray, an AQR spokeswoman, declined to comment on the firm's decline in assets.

Sources said the composition of P&I's 25 largest hedge fund ranking is unlikely to change going forward, dominated as it is by systematic quantitative specialists like Renaissance Technologies, Man Group, AQR and Two Sigma Investments LP/Two Sigma Advisers LP, and platform managers with many investment teams managing parts of multistrategy funds such as Citadel LLC and Millennium Management LLC.

"These types of firms are the only ones with the capacity to really scale up in order to run big hedge funds. Managers really can't do that if they're running strategies like long/short equity or private credit. It doesn't surprise me to see so much asset concentration at the top of the ranking," said Sara Rejal, global head of liquid diversifying strategies based in Willis Towers Watson's London office.

Ms. Rejal said the relative stability of the ranking of big hedge fund managers is "evidence of a mature industry. Growth is relatively flat and investors aren't moving away from these managers."

That said, Ms. Rejal said Willis Towers Watson focuses on investing with or recommending that investment consulting clients consider midsize managers.

"There are some gems in the rough among the middle rank of managers who really want to partner with investors and are willing to align their interests with those of the investors," she said, noting that many of these smaller managers are "adapting better than larger managers to meet investors' need for investment solutions."

The same five hedge fund managers from 2018 remained at the top of P&I's 2019 ranking, but the order was shaken up by AQR's AUM decline.

In rank order by assets managed worldwide in hedge funds as of June 30 were:

Bridgewater Associates LP reported $132.1 billion in AUM to remain in first place with a decline of 0.5% from the prior year.

Renaissance Technologies replaced AQR in the second-place slot.

Man Group held on to third place with hedge fund assets that were up 4.9% to $62 billion.

AQR moved down to Renaissance Technologies' former fourth-ranked position.

The fifth position was retained by Two Sigma Investments/Two Sigma Advisers with AUM up 10.6% to $42.9 billion.

Asset concentration also predominated within the hedge funds-of-funds universe: The 10 largest hedge funds-of-funds managers managed 68% of total category assets of $321.9 billion as of June 30.

Six of the 10 largest hedge funds-of-funds managers saw assets rise in the 12-month period.

With the removal of Blackstone Alternative Asset Management from the top spot in the top-five ranking of hedge funds-of-funds managers as of June 30, UBS Hedge Fund Solutions moved up a spot to No. 1 with AUM of $38 billion, down 6.8% from the same date a year earlier.

Goldman Sachs Asset Management shifted up to fill the second spot from third with assets of $35.5 billion, an increase of 13.6%.

Grosvenor Capital Management LP moved up one spot to third place with AUM of $28.2 billion, up 3.5%.

BlackRock Inc. moved into the echelon of the five largest hedge funds of funds for the first time in the fourth position, up from sixth, with assets of $22.6 billion, up 2%.

Morgan Stanley Investment Management retained the fifth position with assets down 3.9% to $22.3 billion.