Global investment banks shared record revenue of USD 25 billion in 2004 from doing business with hedge funds.
According to estimates by Credit Suisse First Boston (CSFB), the revenue from hedge funds represented about one-eighth of the securities industry's total and increased almost 20 per cent from 2003.
"Hedge funds are one of the key sources of growth for investment banks and the expectation is that revenue will continue to climb,'' said CSFB analyst Marc Rubinstein.
About USD 19 billion of last year's revenue from hedge funds was derived from sales and trading, and the balance came from prime brokerage, CSFB estimates in a 24-page report about the industry published on 9 March.
Hedge funds now account for as much as 50 per cent of the daily trading on the New York and London stock exchanges, and more than 70 per cent of the trading in convertible bonds, Rubinstein reported.
Average daily trading in the foreign-exchange markets climbed 57 per cent in the three years ended April 2004, largely because of hedge funds, according to statistics from the Bank for International Settlements in Basel, Switzerland.
There are currently about 7,500 hedge funds, up from an estimated 2,000 funds in 1990, according to CSFB.
Hedge fund assets have risen as pension funds, endowments and other institutional investors steered more money their way. Tax- exempt investors in the US will boost their allocations to hedge funds to 7.5 per cent this year from 2.5 per cent as recently as 2001, according to statistics from Frank Russell Co in Tacoma, Washington.
The investment banking industry's prime brokerage business has grown in tandem with hedge funds, producing about USD 6 billion of fees last year, CSFB reported.
UBS, Deutsche Bank
Zurich-based UBS AG ranks as the world's biggest hedge fund manager, with more than USD 46 billion of assets at the end of last year, according to CSFB. The business is worth about USD 6.7 billion, or 15 per cent of funds under management, which is the price at which shares of Man Group Plc trade. London-based Man Group is the largest publicly traded hedge fund company.
Among European firms, London-based Deutsche Bank does more prime brokerage business with outside hedge fund clients than UBS, and Rubinstein has placed an "outperform" investment rating on both Deutsche Bank and UBS.