Hedge funds in the sights of regulators

Date: Monday, May 21, 2007
Author: Reuters

(Reuters) - Hedge funds, the target of German-led calls for tighter international supervision, have blossomed in recent years as investors seek the higher returns their riskier, less-regulated investment strategies can generate.

Following are some facts on the industry from a report that the Geneva-based Financial Stability Forum released on Saturday at the request of the G7 industrialised powers.

The report was released at the end of a meeting in Germany of the G8, where Russia participates alongside the G7 countries -- the United States, Japan, Germany, Britain, France, Italy and Canada.

* Since 1999 hedge fund assets under management have grown more than five-fold and may now total $1.6 trillion

* The number of funds has steadily grown to more than 9,000.

* Increased inflows from institutional investors, such as pension funds, have played an important role in the overall growth of the hedge fund industry

* Declining equity prices in 2000-2002 and low nominal yields in fixed-income markets prompted investors to diversify portfolios using alternative asset classes

* Continued institutional investor interest and innovations in markets seem likely to lead to further growth in the size of alternative investments in years to come  

* As the share of institutional investors has risen, that of high net-worth individuals has declined from 61 percent in 1997 to 40 percent in 2006

* In 2006, the assets of the 100 largest hedge fund firms represented about 65 percent of the industry total, compared with 54 percent in 2003

* The very largest global fund groups now manage $20-$30 billion or more each

* The rate of growth of hedge fund management has been more rapid in Europe and Asia than in the United States

* According to one estimate the share of hedge fund assets managed in Asia has risen from 5 percent in 2002 to 8 percent in 2006. The share managed in Europe has doubled to 24 percent and while assets managed in the U.S. have grown sharply in absolute terms, the U.S. share of the global total has correspondingly declined, from more than 80 percent in 2002 to about 65 in 2006

* Hedge fund business accounts for a growing share of the revenue streams of regulated financial institutions. According to one recent estimate, in 2006 hedge fund business accounted for roughly 15-20 percent of all industry revenues in investment banking, of which only one fifth related to prime brokerage

* According to the Bank for International Settlements, bank claims on non-banks in the Cayman Islands, most of which are likely to be hedge funds, rose from $156 billion in March 2000 to $663 billion in September 2006