How We Crunched the Numbers to Find the Richest Hedge Funds

Date: Wednesday, January 6, 2010
Author: Bloomberg.net

Our rankings of hedge funds are based on data compiled by Bloomberg and information supplied by research firms, fund companies and investors.

Our ranking of the most-profitable funds took 2008 performance numbers into account. We recorded total returns for the 10 months ended on Oct. 31. For the many funds that had negative returns in 2008, we determined whether they had exceeded their high-water marks in 2009, since managers get paid only when the value of their funds is greater than its previous highest value.

If they did, the percentage points by which they exceeded this mark were used to calculate profits. As of Oct. 31, several funds that appear on our list of top-performing large funds had not yet reached their high-water marks. See our table of funds that are still underwater.

The returns we obtained were net of fees. We derived gross returns for each fund by dividing the net figure by 100 percent minus the sum of the management and incentive fees. If a fund didn’t report its fees, we used the average of all the funds in our universe: a 2 percent management fee and a 20 percent incentive fee.

Using the gross returns, we were able to reconstruct approximately what the assets were at the start of the year. (Since we didn’t have inflows or outflows, the asset numbers don’t take asset flows into account.) We subtracted original assets from current assets and multiplied the result by each fund’s performance fee to derive the profits.

A Low Profile

Management fees aren’t included; we assume they’re used for the day-to-day operations of funds.

Hedge funds typically keep a low profile. We didn’t have fund assets or returns from several of the biggest hedge fund firms by assets, such as JPMorgan Asset Management and D.E. Shaw. For a handful of other firms, we had returns on only one or two funds.

Although we attempted to get returns for the onshore version of all funds, we used offshore funds if that was all that was available. In several cases, onshore and offshore funds may be combined.

The numbers were difficult to verify. Unless the information was compiled by Bloomberg or the hedge fund firm itself, we tried to verify it with other sources, including investors and other fund databases.

To contact the reporter responsible for this story: Laurie Meisler in New York at lmeisler@bloomberg.net.