Hedge fund's "Billion Dollar Club" loses out to smaller rivals as equity markets rise

Hedge fund allocators were right last year in deciding to funnel more money to firms with $1bn or more - dubbed the ‘Billion Dollar Club' - but this year the higher exposure of smaller funds to rising equity markets has meant returns from the elite club have lagged, according to data providers.

Hedge fund allocators were right last year in their decision to funnel more money to firms with $1bn or more - dubbed the ‘Billion Dollar Club' - but this year a higher exposure among smaller funds to rising equity markets has left the largest managers lagging, according to data providers.

By the end of last year the 340 firms with $1bn or more assets ran a combined $1.76trn, or 86% of the global industry's assets. This was up from 84% a year earlier and 82% the year before, according to HedgeFund Intelligence.

Some 60% of total industry assets is with the 99 firms with $5bn or more.

Allocating to the $1bn club was wise last year as they made money, on average, while the smaller players lost over 5%, each on an asset-weighted basis, according to Peter Laurelli, vice president of eVestment Alliance.

He attributed this to larger funds generally being more diversified across asset classes, and therefore not as hostage to global equity markets, which fell by 10% in 2011.

As some non-equity markets have fallen while shares rallied about 7.3% this year, however, Laurelli says the generally higher equity exposure of sub-$1bn firms helped them make 0.1% in the first quarter, whereas the $1bn club fell mildly, by 0.35%.

Laurelli also suggested hedge fund allocators are paying close attention to recent performance when making allocation decisions.

In the first quarter 41% of long/short equity managers suffered net redemptions overall, but this rose to 71% in the group of managers who underperformed their strategy peer group in 2011.

By contrast, 61% of those long/short equity managers who made positive returns in 2011 also took in net new money in the first quarter of this year.

Laurelli said the first quarter was overall positive for the industry in terms of flows and performance, "despite a blip in March".

The concentration of assets among the largest firms has been positive mainly for New York as a hedge fund centre, as it cemented its position above London and rival US centres, according to HFI.

Some 230 firms of the Billion Dollar Club are in the US, and 139 have headquarters in New York, up from 128 a year ago.

London runs in second place, with 57, down from 63 a year earlier.

The first Continental centre on HedgeFund Intelligence's list is Paris, with five Billion Dollar Club members, and then Stockholm with three.