Hedge Funds Grow Like Kudzu

Date: Tuesday, February 27, 2007
Author: Ken Schachter, RedHerring

Study finds single-manager funds climb 69 percent, harness $1.4 trillion in assets.

Hedge funds seem to be everywhere lately—shifting assets into venture capital, capturing headlines, growing assets.

Now a study points to a reason: There are lots more of them. The number of single-manager hedge funds increased to 13,675 at year-end 2006, a 69 percent increase from the 8,100 funds in 2005, PerTrac Financial Solutions reported.

The study, which analyzed 56,000 investment records from 12 hedge fund databases, placed assets under management for single-manager funds at a whopping $1.41 trillion as of Dec. 31, 2006. That was even higher than the $1.2 trillion reported in a survey by the Hennessee Group consultancy as of Oct. 31.

About 250 funds have more than $1 billion under management, PerTrac reported, while more than one-third of single-manager funds have less than $25 million.

Collecting figures on hedge funds can be a tricky business. No single regulatory body governs the industry, and hedge funds are domiciled around the world. Among single-manager funds, 36 percent were single-manager funds based in the United States, while 64 percent were offshore.

The study also found a sharp increase in the number of “distinct fund managers,” or general partners, who run hedge funds. In 2006, there were almost 4,900 fund managers versus about 3,500 in 2005.

Meredith Jones, managing director of New York City-based PerTrac, which makes investment analysis and asset allocation software used in the financial industry, also found that among funds of hedge funds—collections of hedge funds cobbled together by an investment advisor—established firms were gaining assets, while keeping a lid on the debuts of new funds.

“We’ve noted that consolidation has been the major theme among FOFs in 2006,” Jones said in a statement. “Established funds of hedge funds seem to be getting the benefit of asset inflows, perhaps compressing the growth and launch of newer FOFs.”

Hedge funds allow managers wide latitude on how they put investors’ money to work. PerTrac is backed by New York City-based Insight Venture Partners.

Though their investment strategies sometimes are controversial, hedge funds are popular among investors. A proposal by the U.S. Securities and Exchange Commission to limit hedge fund investing to Americans with at least $2.5 million in investable assets, excluding the value of their primary residence, has drawn a torrent of criticism from the public.

Under current rules, hedge fund investors must have net worth of at least $1 million, including real estate, or earn at least $200,000 a year.