Larger hedge funds dominate industry landscape, as 2020 proves to be the “year of outsourcing”

Outsourcing

The biggest hedge fund firms topped performance charts and drew the most investor capital over the course of last year, with 2020 proving “the year of outsourcing” for a range of middle office functions, as the industry demonstrated its value to investor portfolios, according to new analysis by Citco.

Citco Fund Services’ ‘2020 Hedge Fund Report: A Year In Review’ said the past 12 months had been a “huge year” for the industry, as managers went from “strength to relative strength”, withstanding surging trading volumes and spikes in volatility.

Citco, which provides asset servicing solutions to the global hedge fund and alternative investment industry, probed performance data, trade volumes, treasury services, and investor flows.  Its report suggested hedge funds’ resilience ultimately underlined the sector as a key portfolio diversifier during turbulent times.

A vast majority – 77.6 per cent – of funds delivered a positive annual return last year, with all strategies and assets under administration categories finishing 2020 in the black.

Equity-focused managers led the way, notching up a weighted average return of 22.2 per cent for the year, while fixed income arbitrage came last, but still delivered an average annual gain of roughly 8 per cent.

Citco, which has more than USD1 trillion in assets under administration, indicated larger hedge fund firms dominated the performance landscape last year.

Funds sized at USD3 billion or more posted a weighted average gain of 23.1 per cent, while funds of between USD1 billion and USD3 billion returned just under 17 per cent. Strategies in the USD500 million to USD1 billion bracket made 14.6 per cent for the year, while USD200-500 million fund were up 12.9 per cent. Smaller funds running less than USD200 million in assets gained 3.3 per cent last year.

The study found that the dispersion in returns between the top performers (90th percentile) and bottom performers (10th percentile) was 57.5 per cent for the year, with larger funds again outflanking their smaller counterparts across multiple metrics.

“The key takeaway for fund performance last year was that size matters,” Citco observed in the report.

That also proved to be the case when measuring capital flows, as the bulk of investor inflows headed to managers running more than USD5 billion, while those funds under USD5 billion saw net outflows during 2020.

Overall, based on hedge funds administered by Citco, the industry attracted around USD17.8 billion of investor inflows during what it described as a “monumental” 12-month period.

Citco’s analysis also reinforces the view that 2020 proved to be the year of outsourcing, as hedge funds adapted to homeworking during the coronavirus pandemic. Citco’s Treasury Services saw “significant client adoption” throughout the year, with collateral, trade matching and OTC settlements services growing at an “incredible rate.”

This trend has maintained momentum into 2021, the report observed, as new funds launched with smaller operational footprints and mature funds switch their middle office functions to their administrator to focus internally on higher value tasks.