Hedgeweek spoke to Lisa Corvese, MD Global Product Marketing, PerTrac following the recent release of the company’s eighth annual hedge fund database study entitled: Sizing the 2010 hedge fund universe.
As with previous studies, this latest edition was produced by aggregating data from ten of the world’s largest alternative investment databases.
The study found that 14 per cent more single-manager hedge funds reported in 2010 compared to 2009. Over 55,600 fund share class records were identified representing 23,603 unique unduplicated fund share classes, of which 96.5 per cent reported data.
Whilst this would suggest that hedge fund managers are beginning to respond to calls for greater transparency, the devil is in the detail: firstly, 47 per cent of respondents only use one third party database; secondly, there’s a bias towards smaller funds reporting.
“Right now the industry is bifurcated into those that report and those that don’t,” says Corvese. “The largest of the billion dollar funds are less likely to report simply because they don’t have to. It’s not yet mandated to have to report to third party databases.”
With many who report only choosing to use one database provider, the study said that investors therefore needed to use multiple databases to get a complete overview of fund strategy performance.
“We do these studies because getting an aggregated holistic view of the alternative market place is difficult. Investors have to spend a lot of time and money to get a landscape view, which they need when making pre-allocation decisions,” explains Corvese.
Like single-manager funds, multi-manager FoFs also increased their reporting. Some 98 per cent provided performance data, up from 89 per cent in 2009.
Industry AUM for single-manager hedge funds increased 11 per cent y-o-y to approximately USD1.6trillion. An encouraging sign that the industry is recovering from the redemption-driven downsizing of ’08 and ’09. As for how that AUM is distributed, the study showed that the top 3 per cent of the market (280 firms with USD1billion plus in AUM) accounted for roughly 54 per cent of total AUM.
“It’s very top heavy right now,” says Corvese who thinks it’s a double-edged sword for those looking to allocate to niche funds. “If an investor is truly seeking alpha they have to be careful how much money they allocate to a smaller fund. I think the sweet spot for industry growth is USD500million to USD750million.” Incredibly though, 3,763 funds managing less than USD25million make up just 1.94 per cent of total AUM. “You have to quickly ramp up your capital. I’d say under USD100million is still too small to attract institutional money,” says Corvese.
This distribution of fund sizes mirrors the situation and indeed conundrum facing investors looking to invest in Asian hedge funds. The overwhelming majority run less than USD25million: way too small to attract institutional tickets.
The study also found that there was a 51 per cent increase in fund launches. This again is good news for the industry, although as Corvese stresses: “What we’re looking at now is the business of hedge funds. The industry is susceptible to the same statistics as small businesses: only 15 per cent survive in the first year.”
Unfortunately, FoFs didn’t fare quite as well last year. According to PerTrac, industry AUM was down 10.5 per cent. “Only 108 firms account for 44 per cent of total industry AUM so this begs for mid-market consolidation. It’s still a work in progress but I think there’s a place for FoFs, they won’t disappear,” commented Corvese.
As investors look beyond the CTA market they’re starting to allocate more capital to alternatives as their understanding of them improves according to Corvese. “Alternatives are now just another strategy so I think you’re going to see bigger allocations. Alternatives are not so alternative any more.”
