NASHVILLE, TN, USA, September 21, 1999. – The hedge fund universe expanded for the tenth straight year in 1998, with an estimated 330 new funds created, George P. Van, chairman of Van Hedge Fund Advisors International (VAN), a leading hedge fund investment advisory firm reported today.
“In 1998, we estimate that over 300 new hedge funds were formed, bringing the total number of funds to 5,830 worldwide,” said Van. “While this is still a healthy number of new funds, it does indicate some slowing in hedge fund growth. In 1996 and 1997, for example, the number of funds increased by approximately 9% and 8% respectively, while in 1998, the number of funds increased by about 6%. In addition, the increase in hedge fund assets slowed in 1998, with total equity under management growing to an estimated $311 billion. This represents a net increase of over 5%, compared with 1997’s more robust 13% gain and 1996’s leap of 20%.
“The reasons for this slowdown are fairly straightforward. Last year was marked by significant volatility resulting from the Asian crisis, Russia’s default on its debt, short-term investor panic, and the Fed’s swift action to resist global and domestic recessionary forces. In the third quarter we saw a highly unusual ‘flight to quality’ which severely impacted equity, credit and bond markets, resulting in double-digit losses for most investment vehicles,” noted Van. “In addition, in 1998 the Long Term Capital Management debacle cast its shadow over hedge funds, as did well-publicized losses by many of the ‘name’ funds, including both Soros’s and Robertson’s flagships. Despite all these events, including an extremely difficult third quarter, the average U.S. hedge fund gained 11.7% net in 1998, while the average Offshore hedge fund posted a slight loss of -1.5% net.
“Following the third quarter market problems and negative hedge fund press, the industry expected significant year-end redemptions by hedge fund investors seeking ‘safer havens’ such as U.S. Treasuries. This run on assets didn’t occur, however, because investors were reassured by a strong fourth quarter showing by hedge funds as well as widely disseminated information on actual hedge fund practices. For example, investors learned that the degree of leverage employed by Long Term Capital Management was highly exceptional. They also learned that the typical hedge fund is not capable of influencing markets by virtue of its relatively small size compared with the investment portfolios of large banks, brokerage houses and insurance companies,” Van continued.
“1998 was a watershed year for hedge funds, and 1999 so far has proven to be a whole different ball game. Year to date through August, the average hedge fund was well ahead of both the S&P; 500 and its own performance for the full year 1998. Where last year we saw losses in funds specializing in mortgage-backed securities, this year we have seen strong gains, despite spreads approaching their 1998 levels. Macro and Emerging Markets funds, which last year performed poorly in an unstable environment, are some of 1999’s strongest performers, despite the devaluation of the Brazilian currency and economic tremors throughout Latin America.
“The improvement in hedge fund performance is attributable to several factors,” said Van. “First, lower leverage, particularly in market neutral strategies like mortgage-backed securities, has lowered their volatility and, with smaller positions, has enabled them to move more nimbly. Second, many funds have increased their hedging, no longer lulled into complacency by a seemingly endless bull market. And finally, global economic recovery also has helped.
“Overall, the climate for new and existing hedge funds was good for most of 1998 but it has improved further this year. With the U.S. government’s having not yet imposed new hedge fund regulations in the wake of LTCM and the strong performance of hedge funds thus far in 1999, we are seeing the number of funds increase yet again in 1999,” Van concluded.
HEDGE FUNDS WORLDWIDE TOP 5,500 MARK
Clones-Compensation-Climate Driving Growth
NASHVILLE, TN, USA, June 25, 1998. – As of mid-year 1998, the number of hedge funds operating worldwide has grown to at least 5,500, with equity under management approximating $300 billion, VAN estimates.
The Company’s¹ database of hedge fund information, including performance, covers more than 10 years. During this time, the number of hedge funds operating in the U.S. and overseas has increased by approximately 17% annually, with no sign of letting up. And, should the currently positive economic environment prevail in coming months and years, VAN expects this growth rate to continue.
The Company estimates that presently there are approximately 3,800 US-based hedge funds managing $159 billion, while offshore hedge funds number approximately 1,700 with $136 billion under management.
The Company’s estimates of the growth of the hedge fund universe over time are as follows.
VAN believes that these are conservative estimates, based on a fairly narrow interpretation of what should and shouldn’t be considered a hedge fund. For example, estimates are not enlarged by including most futures or commodity funds, many of which are not true hedge funds. In a similar vein, the Company’s estimate of the amounts of assets managed by hedge funds worldwide doesn’t include those assets that flow through so-called ‘funds of funds’ into individual hedge funds.
Instead, VAN begins with a core group in our primary database of some 2,700 hedge funds worldwide that have reported to VAN their monthly or quarterly performance data. After subtracting from this total a small number of defunct funds that are kept in the database to mitigate survivor bias, VAN then adds to this adjusted number an additional 1,400 hedge funds in the Company’s secondary database and extrapolates from there using its own experience with the present rate of new funds that are opening up daily.
The Company cites a number of factors leading to the hedge fund universe growing so quickly. For one, just about every substantial hedge fund that begins operating in the U.S. now clones itself overseas to accommodate those non-US investors who are precluded from investing in domestic hedge funds, so you get a ‘two-for-one’ effect.
There’s also the issue of compensation. A successful portfolio manager with a large money management firm can expect a handsome salary plus bonus in the high six figures, or possibly into the low millions for the most successful. By contrast, a hedge fund manager with $200 million under management can reasonably earn well in excess of $12 million in a good year because the typical hedge fund charges 1% of assets under management and 20% of annual profits. That’s very strong motivation to succeed in what you’re doing. When one considers that, by some estimates, hedge fund luminaries George Soros, Julian Robertson and Stanley Druckenmiller earned $1.1 billion, $300 million and $200 million, respectively, in 1996, one can see why so many young managers have opted to start new funds.
It’s also never been easier to start a new hedge fund. Prime brokers like Morgan Stanley, Furman Selz and Bear Stearns, who operate very profitable lending and back-office operations for hedge funds, have been sponsoring ‘how to’ seminars for young, would-be hedge fund managers, as have a number of commercial organizations.
Finally, the climate couldn’t be better for starting new funds. Virtually all new and existing hedge funds are benefiting substantially from a flood of capital generated by the long-term economic expansion of the U.S. and the substantial progress of many countries worldwide in recent years. Investors, in effect, are seeking to hedge against a potentially significant drop in the world’s markets, and hedge funds appear to be among the favorite recipients of their stock market profits.
Accommodating these investors are many new homegrown funds coming out of Europe, Latin America and elsewhere. It’s not just a U.S. playing field anymore.
Also adding to the supply of hedge funds is the substantial increase in the number of banks and brokerage firms that are starting hedge funds: institutions like State Street Global Advisors, Alliance Capital Management, Daiwa Securities and Swiss Bank Corp., among many others, have announced new hedge fund offerings.
Hedge fund growth continues unabated. This expansion is expected to continue into the foreseeable future although two very real wild cards always exist: the possibility of unfavorable government regulation and, everybody’s bogeyman, a protracted, very bad market that would tighten all purse strings.