Hedge fund closures up sharply in 2008, assets down more than 30%

Date: Friday, March 6, 2009
Author: Jonathan Ratner, Financial Post

Driven almost entirely by declines in the second half of the year, global hedge fund assets dropped more than 30% in 2008 to just over US$1.8-trillion. While many hedge funds outperformed equity markets and other asset classes, these and other figures paint a rather gloomy picture for the industry.

The numbers come from HedgeFund Intelligence, which publishes Absolute Return and EuroHege. Based on surveys and data from nearly 6000 single-manager hedge funds globally, the firm predicted that assets could fall another 20% or more over the next few months.

Assets stood at US$2.646-trillion at the beginning of 2008 and US$2.679-trillion at the end of June. However, with a significant number of funds having imposed gate provisions or suspended redemptions, further declines in assets are expected before a bottom is reached, HedgeFund Intelligence said. However, it does expect this will come sometime in 2009.

“The decline in assets under management flows from a mixture of negative performance and net redemptions from the industry, as the tumultuous conditions wrought by the global economic crisis had a serious impact on hedge funds in 2008,” the firm said, noting the mean average returns from hedge funds were close to -15% in 2008.

However, there was a huge dispersion in the returns from individual hedge funds, including the minority that were up on the year. The rest of the declines were attributed to net redemptions, as investors took money out of the industry either due to dissatisfaction with performance or to cover for losses and cash calls elsewhere.

“Already, however, there are indications that many end-investors plan to increase their allocations to hedge funds this year – given that hedge fund performance, while negative in 2008, has continued to be significantly better than the returns from most other investments such as equities or real estate/property,” the firm added.

Its research showed that the number of firms running hedge funds with assets of US$1-billion or more fell from 395 in mid-2008 to only 311 at the end of the year. The combined assets of the global “billion dollar” club also fell from US$2.161-trillion to US$1.455-trillion.

New York continues to be the top spot for hedge funds with more than 120 “billion dollar” members and close to 47% of the club’s assets. London is next with 65 such firms and a 17% market share of assets.

At 36%, Asia-Pacific hedge funds fell at the fastest rate in 2008 – from more than US$190-billion to US$122-billion.

“In part, this reflected the fact that a higher proportion of the Asian funds have equity-based strategies – where performance was particularly poor in 2008 – plus higher redemptions from the Asian funds, which generally have easier liquidity terms,” HedgeFund Intelligence said.

Finally, while new fund launches were down sharply last year (only 55 in the U.S. versus 81 in 2007, and 201 in Europe from 370 a year earlier), there was also a sharp rise in the number of shutdowns. Absolute Return has identified at least 200 closures in the U.S. and Americas in 2008. In Europe, there were at least 153 confirmed fund shutdowns, up from 124 in 2007. In Asia, there were at least 100, more than double the prior year.

“Despite what was undoubtedly a very difficult year, the overall performance from hedge funds in 2008 was still much better than in equity markets and most other asset classes, and there were many individual funds that delivered excellent (and positive) risk-adjusted returns,” Neil Wilson, editorial director of HedgeFund Intelligence said in a statement. “And despite some further redemptions already in the pipeline, with the outlook for global markets still looking uncertain it seems to us that investors will increasingly conclude that many hedge funds will offer better ways to invest money and manage risk than the other alternatives. Performance in the early part of 2009 has already been encouraging – despite the difficult markets.”

Meanwhile, new research shows that a majority of all assets under management by hedge funds and funds of hedge funds globally are from institutional investors. A third of those assets from institutional investors now come from pension funds, according to the Alternative Investment Management Association (AIMA).

“These figures demonstrate that the hedge fund industry plays an extremely important role globally for the institutions that look after everyone’s pensions and savings,” said Andrew Baker, chief executive of AIMA. “Hedge funds and funds of funds are skilled at managing risk and delivering stable returns, which institutions need at this time more than ever. They offer an extension of investment capabilities to institutional investors through their skills and expertise.”

TOP TEN HEDGE FUND FIRMS

Firm – Assets under management ($ billions)
Bridgewater Associates – $38.60
JPMorgan – $32.90
Paulson & Co. – $29.00
D. E. Shaw Group – $28.60
Brevan Howard – $26.80*
Och-Ziff Capital Management – $22.10
Man AHL – $22.00*
Soros Fund Management – $21.00
Goldman Sachs Asset Management – $20.60*
Farallon Capital Management – $20.00
Renaissance Technologies – $20.00
 
Source: Absolute Return
 
All asset figures are as of January 1, 2009.
*as of December 31