HF Asset Levels Much Higher, Administrators Report

Date: Monday, July 23, 2007
Author: Chidem Kurdas and Bill McIntosh, HedgeWorld

NEW YORK (HedgeWorld.com)—Estimates of worldwide hedge fund assets have always varied by provider and methodology, since there is no single database that includes all hedge funds.

A Deutsche Bank study in January 2007 put investments in hedge funds at $1.4 trillion. Lipper TASS reported $1.5 trillion at the end of December 2006. (Lipper, part of Reuters, is the parent company of HedgeWorld.) HedgeFund Intelligence put hedge fund assets at $2.079 trillion in January 2007. But there's been growth since these reports.

Now, a survey of fund administrators has come up with an estimate of as much as $3.5 trillion. That number sounds too high. Around $1.9 to $2 trillion is the ballpark figure one most often hears, for example recently at a Merrill Lynch capital introduction meeting in London.

The new estimate by Carbon360 Research, an affiliate of CarbonBased Consulting Inc., is based on information about assets under administration from 74 hedge fund administrators. Ralph Lafferty, research analyst at Carbon, said the estimate comes from a larger sample than other estimates.

The 74 administrators are just about the entire market, so the number is larger because it covers more of the industry, he argued.

Combined assets administered by these firms were $2.72 trillion. But that represents only part of the industry because some funds do not have an outside administrator. Carbon found that in many more esoteric strategies, a high percentage of hedge fund assets are self-administered.

To calculate these self-administered assets, Carbon estimated from the Lipper TASS database that approximately 10% of managers are self-administered and these control 25% to 30% of all hedge fund assets, accounting for an additional $680 billion to $810 billion.

With that, the asset total comes to between $3.4 trillion and $3.5 trillion as of the end of first quarter 2007. That may sound high but looks right, said Mr. Lafferty. Reported fund of funds assets were at $1.05 trillion, but were not included in the total to avoid double counting.

If these estimates are accurate and leverage on average is, say, two to three times capital, hedge funds could be trading from around $6.8 trillion to more than $10 trillion in various financial markets. That is truly a big presence, but divided between many markets the effect on any single one would be less sizable.