Approximately 45 per cent of hedge fund managers in the US and approximately half of hedge funds in Europe and Asia say one or more of their funds remain below their high-water marks.
The relatively large number of hedge funds struggling to reach prior high-water marks in performance is just one of several findings from the 2010 Greenwich Associates/Global Custodian Prime Brokerage Study, demonstrating the extent to which the hedge fund industry is still feeling the after-effects of the global financial crisis.
Almost 55 per cent of the US hedge funds participating in the study and 35 to 40 per cent of hedge funds in Europe and Asia reported performance of 20 per cent or better from the first quarter of 2009 to the first quarter of 2010.
Around the world, nearly 70 per cent of hedge funds delivered investment returns of 11 per cent or better and nine out of 10 reported positive performance for the 12 month period.
“The fact that so many funds remain under their high-water marks after a period of historically strong market performance demonstrates how great an impact this crisis had on hedge funds of all sizes and strategies,” says Greenwich Associates consultant John Feng. “While many aspects of the market are normalizing, our study results show that the events of the past two years have resulted in lasting changes from pre-crisis practices.”
There is one clear indication of the extent to which the post-crisis environment differs from that of the heady days leading into the summer of 2007: hedge fund leverage levels remain significantly below those commonly employed by managers before the start of the market crisis.
Industry-wide, average gross leverage ratios did increase from 1.8:1 in first quarter 2009 to 2.0:1 in first quarter 2010. That overall average includes an increase to 2.3 in 2010 from 2.2 among fixed income oriented hedge funds and an increase to 1.9 from 1.7 among US hedge funds.
Nevertheless, these leverage levels remain well below the 2.3 average reported by all hedge funds and the 3.4 average among fixed-income funds in 2007.
“Looking ahead, hedge funds are hopeful that conditions will improve — especially hedge funds in Asia,” says Greenwich Associates consultant Tim Sangston. “Thirty seven per cent of Asian hedge funds expect to increase leverage ratios in the next 12 months, as do 30 per cent of European hedge funds and 23 per cent of US funds.”
In 2009, assets from endowments and foundations represented 14 per cent of AUM among hedge funds with more than USD1bn under management. In 2010, that share declined to 12 per cent. Meanwhile, the share of hedge fund assets sourced from corporate pension funds slipped to eight per cent in 2010 from nine per cent in 2009.
Funds of funds, which traditionally represent relatively large amounts of institutional assets, made up 26 per cent of total assets among these large hedge funds in 2009, but only 23 per cent in 2010.
The only type of institutional assets that increased as a share of hedge fund AUM over the period were public pension fund assets, which grew to nine per cent of total assets in 2010 from eight per cent in 2009.
High-net worth individuals and family offices remain the primary source of assets for smaller hedge funds, accounting for 61 per cent of assets among funds with less than USD100m in AUM.