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Comment: There's more to the hedge fund industry than meets the eye

Earlier this week, Hedge Fund Research reported that assets invested in the hedge fund industry increased by USD100bn in the second quarter of this year to USD1.43trn - the first quarterly increase since industry assets peaked at USD1.93trn 12 months earlier, according to HFR.

The upswing, however, did not come from new investment, however; HFR says net redemptions totalled nearly USD43bn in the second quarter of the year, albeit an improvement on the outflows of USD152bn and USD103bn respectively over the previous two quarters. Rather, the firm says, the improvement comes from a significant change in the fortunes of emerging markets, convertible arbitrage and energy/basic materials, three strategies that were pummelled by the markets last year.

The news is less bright for funds of hedge funds, which saw net redemptions of USD33bn in the second quarter to leave assets at USD530bn, down from a peak of USD825bn a year earlier. Some of that is down to Mr Madoff, of course, and it was no great surprise to hear that the fund of hedge funds business of Union Bancaire Privée, whose investors were among the biggest losers from the Ponzi scam, had seen its assets shrink by half over the past year.

It just so happens that Carbon360 Research, part of the Opalesque group, has unveiled data about the level of assets serviced by 130 hedge fund administrators, albeit only up to the end of the first quarter. Carbon360 reports that put together, the assets of single manager hedge funds and funds of hedge funds plummeted an eye-watering USD1.35trn over the 12 months to the end of March.

That amount is almost as much as HFR's current total for the entire industry. But Carbon360 reckons that - at least according to administrators - hedge funds and funds of funds still accounted for just under USD2.5trn art the end of March, and that the industry amounted to no less than USD3.8trn at its peak.

Here again is the staggering disparity between estimates of hedge fund assets that are based on surveys of managers and those that count assets under administration. It's true that at least one administrator is baffled by Carbon360's numbers, but overall they are in line with other surveys of administrators in suggesting that the size of the industry has always been significantly greater than the numbers produced by managers would make you think, and remain so despite the depredations of the past 12 months.

There are a wide range reasons posited why administrators should come up with a much greater total of assets than managers, including the possibility of double-counting (although survey organisers say this is not an issue) and almost certainly some differences in deciding what constitutes a hedge fund, which has always been as much art as science.

But the Carbon360 research does at least suggest that one reason why the hedge fund services industry has not - as yet, at least - been hit as heavily as might have been expected as asset-based revenue declines is that there are more assets in the industry that many observers have reckoned with.

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