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Study Shows 61 Percent Increase in Hedge Funds and Fund of Funds

Date: Tuesday, February 27, 2007
Author: Meredith Jones, RiskCenter

PerTrac Financial Solutions (PerTrac) yesterday announced the aggregate results of the 2006 PerTrac Hedge Fund Database Study, revealing that there was a 61% increase in hedge funds and funds of hedge funds in hedge fund databases since the 2005 study.

“Investors and industry watchers will be interested to learn that the number of distinct hedge fund and funds of hedge funds we were able to identify in hedge fund databases in 2006 with duplicate funds removed increased by 61% from the prior year,” said Meredith Jones, Managing Director of PerTrac. “The number of single manager hedge funds increased by 68%, while the number of funds of hedge funds increased by 46%,” she added.

The study, released annually since 2003, has become a widely-followed indicator of the size and composition of the hedge fund industry. The 2006 study was conducted using data from twelve major hedge fund databases, combined and analyzed with the PerTrac Analytical Platform.

Key Findings of the 2006 PerTrac Hedge Fund Database Study

The 2006 PerTrac Hedge Fund Database Study found a total of over 56,000 investment records across all databases, including both single manager hedge funds and funds of hedge funds (FOFs). Records are the total number of funds in all databases including all duplicate fund records. This total represents a jump of more than 15,000 records from last year. This more than 36% growth in hedge fund listings is due not only to growth in the number of existing hedge funds but also to further strides among databases in data collection and coverage of the hedge fund universe.

Within the overall collection of more than 56,000 records, the PerTrac Analytical Platform revealed approximately 19,800 “distinct” hedge fund and fund of funds investments among the various hedge fund databases once duplicate records were removed. This figure counts individual classes within funds as distinct investments.

Other key findings include:

Over 15,400 distinct funds reported performance data in 2006.

• Nearly 13,675 single manager hedge funds were identified, as well as approximately 6,100 FOFs. This compares with 8,100 single managers and 4,150 FOFs identified in the 2005 study.

• Nearly 4,900 distinct fund managers (general partners) were counted. Related fund management companies (subsidiaries, etc.), where identifiable as such, were counted as a single fund manager. This compares with approximately 3,500 general partners that were identified in 2005.

• Of the single manager hedge funds, approximately 10,200 reported performance in 2006. Of those, approximately 35% were onshore funds and 65% were offshore.

About 36% of identified single manager funds were domiciled onshore (in the United States) while about 64% were domiciled offshore. Among FOFs, approximately 18% were domiciled onshore while 82% were offshore.

Assets under Management by Single Manager Funds Top $1.41 Trillion, $700 Billion Flows through Funds of Hedge Funds

Single manager funds in the databases account for over USD 1.41 trillion under management. Approximately 250 funds have surpassed the USD 1 billion mark. Meanwhile, over one-third of single manager funds continue to manage less than USD 25 million.

Approximately 4,150 of the single manager funds appear to be ‘clones’ of another fund, meaning that they trade pari passu, either as offshore funds, super-accredited (3(c)7) funds or separate share classes (usually differing in currency denomination) of a single fund strategy.

There were approximately 6,100 different FOFs that appeared in the study, and nearly 5,250 had reported performance numbers in 2006. Of those FOFs which had reported last year, about 16% were domiciled onshore and 84% were offshore. There appears to be about USD 700 billion invested into hedge funds through FOFs, although just over a quarter of them manage less than USD 25 million.

Among the 19,800 distinct investments identified in the study, approximately 1,400 of them appear to be managed by Commodity Trading Advisors (CTAs). These managers’ funds or investment programs typically trade mainly futures and currencies. Reported assets among these investments totaled approximately USD 150 billion.

Few Funds Report to More than Two or Three out of Twelve Databases

“As with prior years’ studies, PerTrac noted significant overlap between the various databases,” said Ms. Jones. “However, as the graph below shows, despite overlap between and widespread growth among the databases, relatively few hedge funds and fund of hedge funds report to more than two or three databases, and almost none report to all twelve databases. In fact, a significant number of hedge funds and FOFs, more than 5,000 in the twelve-database sample, appeared only in a single database. This averages out to about 475 “exclusive” funds in each database, underscoring the importance of accessing multiple data sources when conducting serious hedge fund screening and analysis. No single hedge fund database covers even half of the identified distinct investments. It is therefore necessary for savvy hedge fund investors, looking for the most comprehensive data sample on which to base their investment and asset allocation decisions, to subscribe to more than one database to achieve the most substantial coverage.”

Launches of Single Manager Hedge Funds Increase, Funds of Funds Lag

The number of new single manager hedge fund launches has continued to increase over the past few years, but the rate of increase has fallen off somewhat since the beginning of the decade. Just over 2,000 single manager hedge funds started in 2005, an increase of more than 100 from the year before.

Launches of new FOFs, on the other hand, continued to show a marked increase each year since 2000, with the notable exception of 2005. The number of FOF launches fell off from nearly 1,100 in 2004 to approximately 850 in 2005.

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

(Figures for 2006 fund launches are not considered reliable indicators and are not disclosed here because many newly launched funds do not begin reporting to databases prior to their one year anniversary.)