(The preceding headline should be read with as much sarcasm as possible.)
Quote of the day/week/month:
"...trade with a trend, ride your winners, cut your losers and manage your risk." - Ed
SeykotaPretty simple words and concepts but so hard to execute 100% of the time all the time.
There is an article over on the
AllAboutAlpha.com blog on the state of the hedge fund industry.
The move is towards consolidation and the big players are getting bigger and the small players fighting over the table scraps. This article reinforces the inequity and silliness of the minimum net worth requirements. As the large funds cater to large institutions with no problems meeting the minimum requirements, the small HF managers are targeting the smaller (likely individual) investor who may be excluded by the newly proposed minimums. The proposed regulation favors one size of HF over the other. As history has shown us, bigger
doesn’t always mean ‘safer’ (Amaranth and
MotherRock are two very recent examples).
From the article:
“The study pegs the entire hedge fund industry at $1.4 trillion. But it also confirms a hunch we’
ve had for some time - that the industry continues to become more concentrated.
According to the study, there were approximately 250 funds with over $1 billion of assets in 2006. If we assume an average fund size of a modest $2.5b for this category, that would explain around $625 billion of the industry. About 400 funds had between $500 million and $1 billion of assets. Using $750 million an average, that’s around $300 billion for this group. So about two-thirds of the hedge fund assets in the world ($925b) are managed by the top 650 (5%) of funds.
Meanwhile, the other 95% of hedge funds are left to compete for the remaining $485b (for an average of about $30 million each). At a fee of 2 and 20, that’s about $1m in revenue for each fund - enough to pay the landlord, a few staff, and
Bloomberg or Reuters. And that’s the average fund. (Thankfully, these small fry are probably more likely to have more than one fund on their books. But
PerTrac’s Meredith Jones says they also tend to have less pricing power.)
Coincidentally, Institutional Investor
reports today on a study by the Milken Institute showing that the top 3% of hedge fund managers control 35% of hedge fund industry assets (using
HedgeFund.net data). This is roughly in line with the data in the
PerTrac report.
This level of concentration
isn’t out of line with the mutual fund industry, says Jones. And with institutional investors seeking larger, more stable hedge funds, growth of the larger players is becoming a “virtuous cycle”.
So despite the media’s claim that there are “8,000″, “10,000″, or “15,000″ hedge funds in the world, it seems
only about 1,000 hedge fund managers would probably ever make it to the radar screens of most investors."
Well, here’s some advice for all the small managers out there fighting the good fight; focus on performance, keep overhead and expenses low and try to build assets organically first and foremost and then shop the performance around in hopes of drawing outside investors. Eventually through enough organic growth and glowing performance, the institutional money may just come knocking one day.
Happy weekend.
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Labels: commentary, hedge funds