The Alternative Investment Management Association

Alternative Investment Management Association Representing the global hedge fund industry

The market was tougher in 2005 but Asia contined to grow fast

Editors of Absolute Return, EuroHedge, AsiaHedge and InvestHedge

HedgeFund Intelligence

Q2 2006


The US
By Sarah Wood, Absolute Return

The year 2005 will be remembered as a sobering one in the US hedge fund industry. After several years during which talented managers seemed to be able to raise more capital than they could run though word-of-mouth alone, the task suddenly became more arduous and assets at many solid funds actually fell. Likewise, managers had to work harder than ever to eke out decent returns, and most prepared to hang up their hitherto freewheeling ways to become government-regulated entities.

To measure the notoriously opaque US hedge fund’s growth, Absolute Return twice a year conducts exhaustive surveys of the industry’s largest new fund launches as well as total assets of the industry’s ‘Billion Dollar Club’ of managers who run $1 billion or more of capital.

Data on this year’s Billion Dollar Club will be forthcoming soon, but the figures for 2005 new fund launches are already in – and they aren’t that pretty. After rising by 83% in 2004 over 2003, assets raised by US startups containing at least $50 million fell by 17.5% in 2005 from the year-earlier period.

To put this in perspective, the 2005 launches still raised about $33 billion, more than 50% higher than the new funds pulled in just two years ago, when Absolute Return first began conducting surveys. And the year also witnessed the biggest launch in hedge fund history – Dinakar Singh’s TPG-Axon, which by December 1 had taken in an astounding $5.49 billion, and was still clocking stellar returns.

What’s to blame for the slowdown? Certainly, poor performance was a key factor. Some firms, particularly those that were able to correctly play run-ups in the energy and international markets, such as Nick Maounis’s Amaranth Capital Management, as well as corporate activists, who created their own catalysts for gains, including Bill Ackman’s Pershing Square, were able to shoot the lights out.

But overall, the picture was unsettling: The median return for all US hedge funds tracked by Absolute Return fell in 2005 to a meager 5.78%, the worst in the index’s history. And tepid performance from many of the prior year’s most high-profile launches, such as Eric Mindich’s Eton Park, had to make investors more careful about committing assets to untested startups.

What lies ahead in 2006? Early signs are that managers are getting proactive, such as by launching new funds meant to attract investors not satisfied with their flagships. The most promising of these are vehicles concentrated in managers’ best ideas and could be a boon to managers and investors alike. But the more volatile funds will of course require very good ideas indeed – not to mention investor patience.

One possible distraction in the industry’s efforts to right itself may be the US SEC’s new registration requirement, which goes into effect this year. But overall, the move is expected to be a positive one, ensuring that hedge funds have the compliance and operational support they need to establish investor trust for the long term.

Figure 1: The Absolute Return new funds survey of US launches

No. of new funds $50m or more
Total Assets


Figure 2: The Absolute Return US ‘Billion Dollar Club’ of managers who run $1 bn or more of capital

No. of $1bn firms
Total Assets

Source: Absolute Return




By Nick Evans, EuroHedge

In the face of unrelenting ‘bad news’ coverage from most sections of the mainstream media, the European hedge fund industry had a remarkably strong year in 2005 and has started 2006 in vibrant form. As ever, the reality and the myth were poles apart.

Notwithstanding specific market-related problems and reduced returns in areas such as credit, convertibles and certain other arbitrage strategies, the long/short equity community – still by far the dominant segment in Europe – is in robust shape.

The EuroHedge European long/short equity index recorded its best performance for five years. Helped by strong underlying equity markets, numerous long/short funds delivered returns of 20%, 30% and more.
And the biggest European-based fund operating an equity-focused strategy – The Children’s Investment Fund, Chris Hohn’s $6bn investment operation – generated a gain of over 50%. No sign there of the supposedly ever-diminishing returns in hedge funds.

Asset growth has slowed a little. But that is only to be expected in an industry where assets under management in Europe have grown tenfold in only six years – from $28bn in 1999 to nearly $300bn now. Nothing can keep growing at that rate forever.

New funds are still coming through in record numbers – and in record size, with five new ‘blockbuster’ launches in 2005 with initial assets of over $1 billion each in Europe. And the pace of start-ups is still hectic – from established hedge fund platforms looking to diversify their strategy mix, from new institutional players, and from the pure start-ups that have always been the lifeblood of the business.

Despite some high-profile and occasionally surprising shutdowns in 2005, the attrition rate – at around 10% of the funds that were trading at the start of the year – is no higher than in previous years, nor any higher than in other entrepreneurial businesses.

There are signs of several trends from the US industry starting to cross the Atlantic: greater activism among hedge funds as investors; increasing appetite for illiquid and less crowded strategies; a growing move by the big players into private equity and investment banking activities; higher fees and longer lock-ups (for those who can get them, at least); and an increasing focus by the bigger players on the strategic growth of their businesses.

As institutional investment starts to replace the high-net-worth investor as the driving force in hedge funds globally, managers are having to devote more time to the infrastructure, risk and control issues that pre-occupy these big investors.

But the private, family investor is not about to be squeezed out of the game. These are the investors that back many of the more ‘off-piste’ strategies that keep the hedge fund industry vibrant and dynamic. That restless search for the new thing is as strong as ever and it is here that the savvy high-net-worth investor will always play a key role.

Figure 3: New European hedge funds 2000-2005

No of new funds
Assets raised
2005 (1st half)

Figure 4: European hedge funds 2000-2005

No of funds*
Total industry assets
Jan 2001
Jan 2002
Jan 2003
Jan 2004
Jan 2005
Jul 2005

*De-duplicating for multiple asset classes: each fund (strategy) is counted only once.
Source: EuroHedge database



Asia Pacific
By Paul Storey, AsiaHedge

As we enter the Year of the Dog, the Asia-Pacific hedge fund industry has arguably just experienced its most successful year ever.

Assets are likely to have grown very strongly, pushing the $100 billion mark for the first time by the end of 2005, having been at $60 billion a year ago.
New fund start-ups have also been strong although the second half of 2005 suggests that growth has begun to slow, if not in the number of new funds but in the amount of assets raised – slightly under $3 billion compared to nearly $4 billion in the first half of the year.

It is unclear yet whether a period of slower growth is just starting, in line with a global slowdown in hedge fund growth, or whether the industry is going through a brief period of digestion – as it has at various times before. The immediate signals would tend to suggest the latter with the number of start-ups continuing at break-neck pace in the first half of 2006. The total number of funds investing or managed in Asia seems sure to breach the 700 mark in the course of 2006. There were just over 100 funds when AsiaHedge was launched back in 2000.

Along with this growth comes a continued widening of the industry in terms of types of strategies being pursued by managers, and into newer markets such as India and China, as well as resurgent growth in the region’s biggest market, Japan. There is also a proliferation of commodity-trading funds, and activist strategies in the ex-Japan markets also beginning to come through.

With Asia-Pacific hedge fund assets still representing less than 10% of the global industry’s total, it is clear that the region remains under-represented – despite the wave of money that international investors have been sending its way over the past couple of years. But with the region’s hedge funds continuing to outperform their peers elsewhere in the world, there are strong arguments for the Asia-Pacific part of the industry to continue seeing very strong growth in the coming 12 months.

However, there are the inevitable caveats, specific to the region, which could result in a slower rate of advance. First, Japanese financial institutions are being affected by the vagaries of the Basel II agreement on capital ratios – which will most likely see higher levels of provisioning attached to investments in the more exotic investment styles. This may result in a move away from hedge funds towards long-only forms of investment again.

Second, there is still a shortage of top quality personnel in the regional industry, a situation that has been exacerbated by the arrival of now more than 60 western-headquartered hedge fund groups into the region, mainly based in Hong Kong. On the other hand, spin-outs from existing hedge funds and movement from local Japanese financial institutions and the traditional financial sector region-wide can be expected.

Third, Asia-Pacific hedge funds may have done well in comparison to the rest of the hedge fund industry, but they still underperformed the leading benchmark equity indices in 2005 – and this was for the second year running. For now, international investors will not mind, but managers investing and located in the region should not ignore the sensitivities of broad performance in 2006.

Figure 5: Asia Pacific hedge funds 2000-2005

Total industry assets
Dec 2000
Dec 2001
Dec 2002
Dec 2003
Dec 2004
Jun 2005

Source: AsiaHedge database

A significant proportion of Asia-Pacific hedge funds also continue to be managed from the US and Europe – one of the quirks of the industry, which is also reflected in proportionately greater interest from investors located in those regions by comparison with those based within the region itself.
With the exception of Australia, the Asia-Pacific industry’s institutional investor base is largely located in the West – and this situation seems to be changing quite slowly. While this continues to be the case, question marks will continue to be raised about how firmly based the recent rapid growth has been.


Funds of funds
By Niki Natarajan, InvestHedge

The fund of hedge funds industry continues to grow in 2006, despite continuing scepticism about its future.

The fund of funds business grew in 2005 by 12%, equivalent to $72 billion – counting only the 134 management groups with more than $1 billion, as surveyed in the InvestHedge ‘Billion Dollar Club’ (see Figure 6). This number, as well as the year-end average performance of 7%, according to the InvestHedge Composite, goes counter to the cynics who predict the beginning of the end of the fund of funds industry.

That said, the industry did experience more net outflows than last year than before – with 31 groups losing collectively more than $12 billion, with the asset figures for many European based funds dropping in dollar terms simply due to the rise of the US dollar against the euro.

What is certain in the fund of funds industry is that the tide is turning and changes are afoot. The M&A activity that started in 2005, including ABN AMRO Asset Management’s purchase of International Asset Management, the Bank of Ireland’s deal with Guggenheim Alternative Asset Management, Harcourt’s union with Vontobel and Julius Baer’s merger with GAM, is likely to continue and perhaps gather momentum as the smaller players realise they need critical mass or distribution.

Donald Putnam of Grail Partners summed this view up eloquently in a research piece entitled ‘Adapt or Die Trying’. Putnam said: “There is room for specialised offerings and proprietary distribution, but few will be independent.”

This year is also likely to see many of the trends that started to gather pace in 2005 continue. Despite the many challenges, it was in fact a year of innovation – with many groups starting to create niche funds of funds in new strategies and regions such as India, energy, credit, emerging managers and commodities.

The Year of the Dog will also see more international hedge funds and funds of funds setting up shop in Asia, particularly in Hong Kong in pursuit of alpha-generating opportunities as well as Asian investor assets. There will be more funds devoted solely to Asia, Japan and India, following in the footsteps of the pioneers in this space who saw their returns average 15.47% in 2005.

While the performance was not as terrible as it might have been, what is starting to unsettle many investors is the funds of funds’ correlation to equity markets. If uncorrelated performance does not pick up in 2006, assets could start to flow out of funds of funds and into multi-strategy hedge funds, simply to remove the additional layer of fees. This is more than likely with investors pursuing portable alpha strategies.
Fees are already a bone of contention, but where there has been performance and access to high quality capacity, investors are not unhappy, as the asset growth data shows. The J. Sainsbury’s Pension Fund is just one recent example of an investor increasing its hedge fund allocation from 1% to 3%, adding $124 million to its two existing funds of funds providers.

In the US, the forthcoming SEC regulations will also have an impact, as funds of funds will be forced to create products with longer lock-ups – to house the ‘blue chip’ hedge funds that would rather not register with the SEC. Meanwhile a lack of ERISA-specific capacity will also force changes to product development. The key for 2006, however, will be to deliver strong performance, particularly if the risk free rate goes up to 5% or higher - otherwise justifying current fee structures will become a serious issue.

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