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In partnership with:
IFSL RESEARCH
H F 2010EDGE UNDS
A 2010 WWW.IFSL.ORG.UKPRIL
OVERVIEW
Chart 1 Global hedge fundsGlobal hedge fund assets under management posted strong gains for much of
2009 following sharp falls seen in the previous year due to conditions brought$bn assets (bars) Number (line)about by the global economic downturn. This IFSL report provides an
2,200 12,000
overview of the global hedge funds industry with particular emphasis on2,000
Londons role as the second largest global centre for hedge funds.1,800
10,0001,600Assets under management of the hedge fund industry increased by 13% in
1,4002009 to $1,700bn (Chart 1). This followed a 30% decline in the previous year.1
1,200Redemptions continued for the second year running, albeit at a slower pace. 8,000
1,000The 19% return in 2009, the best hedge funds performance in a decade, more
800than made up for the $85bn in net outflows. The number of hedge funds
600
totalled around 9,400 at the end of the year, a reduction of more than 1,0006,000
400from the peak seen two years earlier. New hedge fund launches however
200exceeded the number of liquidations in the second half of 2009. Growth of
4,0000hedge fund industry assets is likely to continue in 2010 barring further 2000 2002 2004 2006 2008
2001 2003 2005 2007 2009
economic turbulence or major regulatory changes. Source: IFSL estimates
The fund of hedge funds industry has been particularly affected by the
economic downturn and the reputational damage following the revealing of theChart 2 Liquidation of impaired assets
Madoff fraud in 2008. Assets of fund of funds totalled around $500bn at the
end of 2009, down 17% from the previous year, and over 40% below the peak$bn Impaired assets Assets returned to
seen two years earlier. The proportion of single manager hedge fund assets standard liquidity terms174
originating from fund of funds fell to 30% in 2009 from 40% a year earlier.
145Flow of funds The surge in redemptions which started in the latter part of 2008 41%54%
continued in the first half of 2009. Some hedge funds were forced to suspend 71%116redemptions because selling illiquid assets would have exposed the remaining 86%investors to bigger potential losses. Firms more oriented towards institutional 87
investors have fared better in this environment as institutional investors have58been less inclined to redeem assets. More than a half of impaired assets at the 59%
end of 2008 were returned to standard liquidity terms by the end of 2009 46%29
29%(Chart 2). The asset raising environment slowly improved during 2009 with a14%
return to net asset inflows in the second half of the year (Chart 3). 0Q1 2009 Q2 2009 Q3 2009 Q4 2009
$174bn global assets estimated as impaired at end-2008Location of management The US was the largest management centre for
1
Source: Credit Suisse / Tremont Hedge Index
hedge funds with 68% of the total at the end of 2009, down from 82% a decade
earlier. Europe followed with 23% and Asia 6%.
New York is the worlds leading centre for hedge fund managers, followed by
London. IFSL estimates that around 41% of global hedge fund assets were
managed from New York in 2009, down from over 50% at the start of the
decade. Londons 20% share of the global total was unchanged from the
previous year. London is by far the largest centre in Europe for the management
of hedge funds. At the end of 2009, three-quarters of European hedge fund
assets totalling nearly $400bn were managed out of the UK, predominantly
from London. The UK is also a leading centre for hedge fund services such as
administration, prime brokerage, custody and auditing.
11 Estimates of the size of the hedge fund industry vary due to restrictions imposed on advertising andreporting of performance by hedge funds. As there are no authoritative estimates this report is based on
commercial databases and index providers which rely on information provided voluntarily.
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April 2010 Hedge Funds
THE GLOBAL HEDGE FU NDSChart 3 Net asset flow
INDUSTRY
$bnNet asset flow Re turns
Assets under management of the hedge150250
fund industry increased by 13% in 2009 200to $1,700bn (Chart 1). This follows a 100
150
30% decline in the previous year.100 50
Redemptions continued for the second 500year running, albeit at a slower pace. 0
Strong performance in 2009 however -50 -50more than made up for the $85bn in net -100
-100outflows. -150
-200-150
-250Flow of funds The surge in redemptions
-300which started in the latter part of 2008 q3 q4 q1 q2 q3 q42000 -2002001 2002 2003 2004 2005 2006 2007 2008 2009
20092008continued in the first half of 2009. Source: IFSL estimates
Hedge funds more oriented towardsinstitutional investors have fared better in this environment as they have been Chart 4 Hedge fund launches andless inclined to redeem assets. Some hedge funds were forced to suspend liquidations
redemptions towards the end of 2008 because selling illiquid assets would haveNumber
exposed remaining investors to bigger potential losses. More than a half of2,500 Launched
these impaired assets were returned to standard liquidity terms by the end of Liquidated2,000
2009 (Chart 2). The asset raising environment slowly improved during 2009
with a return to net asset inflows in the second half of the year (Chart 3). 1,500
1,000
Number of hedge funds The number of hedge funds totalled around 9,400 at500
the end of 2009. Three-quarters of these were single manager hedge funds and
the remainder fund of hedge funds. This 2009 total represents a reduction of 0
more than 1,000 from the peak seen two years earlier (Chart 4). The fall was-500
caused by funds closing due to losses, lack of liquidity and redemptions as-1,000
investors looked for safer investments. New hedge fund launches however
exceeded the number of liquidations in the second half of 2009. -1,5002000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: IFSL estimates
Employmen
t
According to the Alternative Investment Management
Association (AIMA), the UK hedge fund industry employs around 40,000Chart 5 Management location of global
people. Around 10,000 of these are directly employed by hedge funds and thehedge fund assets
remainder among the industrys advisers and service providers. The hedge fund% share of assets under management
industry employs some 150,000 people worldwide.1% 3%1005% 6%
Geographical distribution of hedge funds 12%80 23%
Domicile of fund Hedge funds can be registered in onshore or offshore60
locations. Around 60% of the number of hedge funds in 2009 were registered
in offshore locations. The Cayman Islands was the most popular registration40 82% 68%
location and accounted for 39% of the number of global hedge funds. It was
followed by Delaware (US) 27%, British Virgin Islands 7% and Bermuda 5%.20
Around 5% of global hedge funds are registered in the EU, primarily in Ireland
and Luxembourg.0
2002 2003 2004 2005 2006 2007 2008 2009
Location of management Hedge funds are predominantly managed from US Europe Asia Other
onshore locations. The US is by far the leading location for management of Source: IFSL estimates
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hedge fund assets with over two-thirds of theChart 6 Top hedge fund cities
total. Its share, however, was well below its
80% share at the start of the decade. Europe % share of total hedge % share of largest 100 hedgefund assets by location of funds assets by location of doubled its share during this period (Chart 5). Londonmanager manager
New York
New York is the worlds leading centre for 5550 Othermana gers of hedge funds, followed by New York45 San FranciscoLondon. IFSL estimates that 41% of global 11%3%40 Wesport
hedge fund assets were managed from New 4%35
York in 2009, down from over 50% at the Greenwich 6%30 47%
start of the decade (Chart 6). Londons 257%Boston2020% share of the global total was unchanged
15from the previous year. A breakdown by 21%10management location of the largest 100 5 Londonhedge funds shows that New York 0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
accounted for 47% of assets in 2009,Source: IFSL estimates
followed by London 21%, Boston 7% andGreenwich 6%.
Chart 7 European based hedge funds marketLondon is much the largest centre in Europe
for the management of hedge funds. % share, 2009$bn Number
According to Eurohedge data, at the end of Assets $bn 2,000600Number of funds2009, 76% of European single manager
Otherhedge fund assets totalling $382bn were 500 US
Netherlandsmanaged out of the UK, the vast majority 1,500 UKFrance
2%2%2% 9%
from London (Chart 7). Londons share was 400 Switzerland 4%
up slightly from 75% in the previous year. If Sweden 5%76%1,000300
fund of funds assets are taken into account,
London probably accounts for close to 90% 200of hedge funds assets managed in Europe. 500There were nearly 1,400 European-based 100
hedge funds in 2009, of which two-thirdsTotal: $382bnwere located in London. Other important 00 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
locations for hedge fund managers in Source: Eurohedge
Europe include France, Switzerland and
Sweden.Chart 8 Global hedge fund returns
Many hedge funds in Europe have recently launched UCITS III compliantaverage annual return, %stand-alone onshore fund vehicles which are allowed to be distributed30
throughout the EU to institutional and retail clients. These funds employ a
range of strategies that use derivatives and limited leverage within a regulated25
framework. A Deutsche Bank survey recorded a 50% growth in 2009 of UCITS 20
assets under management and 15found that 35% of investors in its Table 1 UCITS Absolute Return Funds 10survey plan to allocate to such
5end-2009funds in 2010. The UK is the Number $bn, assets
0UK 72 14.4dominant centre in this area andFrance 21 4.6
accounts for about a half of -5Luxembourg 9 4.4assets under management and Sweden 3 2.3 -10
Italy 3 1.1number of funds (Table 1). -15Others 38 3.5 1998 2000 2002 2004 2006 2008
Total 146 30.3 1999 2001 2003 2005 2007 2009
Despite the global economic Source: Hedgefund IntelligenceSource: Hedgefund Intelligence
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slowdown, London retains its structural advantages which make it an attractiveChart 9 Asset flows by sector
location for hedge fund management. These include its local expertise, the
proximity of clients and markets and a strong asset management industry. $bn-4.8London is also a leading centre for hedge fund services such as administration, Convertible Arbitrage H1-2009 -0.9
prime brokerage, custody and auditing. With around a half of European -0.7H2-2009Dedicated ShortBias0.1
investment banking activity conducted through London, it is a natural location-6.0
Emerging Marketsfor prime brokerage services. 0.7
-0.4Equity Market Neutral
2.2Asia, and more particularly China, is taking on a more important role in the -26.5Event Drivenglobal hedge fund industry more as a source of funds than a location for 6.7
-6.1management. The UK and the US are leading locations for management of Fixed Income Arbitrage -1.3Asian hedge funds assets with around a quarter of the total each. Other -6.5Global Macro 1.8important centres include Hong Kong, Australia, Singapore and Japan. -20.6Long/Short Equity
7.1
HEDGE FUNDS RETURNS AND INVESTMENT STRATEGIES 0.2Managed Futures2.9
-19.5Multi-Strategy
Hedge funds 2009 return globally averaged 19%, the highest for a decade
-1.7
-30 -25 -20-15 -10-5 0 5 10(Chart 8). This comes just one year after hedge funds posted the worst
Source: Credit Suisse/Tremont Hedge Fund Index
annual loss in history brought about by the falls in equity markets, a ban on
short-selling and pressure to liquidate positions to meet margin and redemption Chart 10 Global hedge funds by sourcecalls. As market conditions improved in 2009 and equity markets recovered, of capital
hedge funds saw positive performance across most strategies. The 2009 return % share
was lower than the 27% return on the MSCI World Index but much higher than 100 8% 8% 8% 7% 12% 14%the 6.9% of the Barclays Capital Global Aggregate Bond Index. 90 7%10% 9% 9%
12%80 12%10% 12% 15% 15%
Hedge funds investment strategies vary enormously. Strategies may be 70 14%19%18%
designed to be directional (which try to anticipate market movements) or 60 20% 30%24%market-neutral (which have low correlation to the market movements). Equity 50 31%
29%
long/short strategies typically account for the leading share of strategies. While
40
nine out of ten of the most common investments strategies saw a net outflow 30 54%48% 44%20 44%of funds in the first half of 2009, only four experienced outflows in the second
31% 26%10half of the year. Long/short equity, event driven, managed futures saw the0biggest inflows in the second half of the year (Chart 9). 1999 2001 2003 2005 2007 2009
Individuals Fund of funds Pension funds
SOURCES OF FUNDS Corporations Endowmentsand foundationsSource: Hennessee Group LLC
Institutional investors are the biggest source of
capital for hedge funds, having overtaken high net Chart 11 Institutional investors in hedge fundsworth individuals in 2008. Funds with a higher
proportion of institutional investors fared better in % share, 2009
market conditions of falling liquidity in 2008 and by type of investor by originating countrythe early part of 2009. A breakdown of institutional
Other Other Fund of hedgeinvestors by type of investor shows that fund of funds
12%hedge funds accounted for 24% of assets, followed 20%Asset managers
24%6% USby public pension funds 17%, endowment plans Germany
2%
14% and private pension funds 14% (Charts 10 and Canada 3% 52%Family offices 13%3%Australia
11). The geographical breakdown of institutional5%17% Switzerlandinvestors shows that more than a half originate in
14%
the US, followed by the UK 14% and Switzerland 14%14% PublicpensionUK
5%. fundsPrivate pension fundsEndowment plans
Fund of hedge funds assets totalled around $500bnSource: Preqinor some 30% of global hedge fund assets. This was
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Chart 12 Global Fund of Hedge Fundsdown 17% from the previous Table 2 Largest hedge fundsindustryyear and nearly a half below the
peak seen two ye ars earlier $bn, assets under Number of Largest hedge funds (January 2010)$bn management funds
(Charts 12 and 13). The value of 1. JP Morgan 50.4 900 3,500
the industrys assets began to fall 2. Bridgewater Associates 43.6 8003. Paulson & Co. 32.0in mid-2008 as investors began 4. Brevan Howard Asset Management LLP 27.9 3,000
700converting their investments into 5. Soros Fund Management 27.06. D.E. ShawGroup
23.6cash due to widespread losses in 6007. Och-Ziff Capital Management Group 23.5 2,500
the hedge funds industry. The 8. Baupost Group 50021.8fall in reputation of the industry 9. Man AHL 21.7
40010. Angelo, Gordon & Co. 20.8 2,000following the revealing of the300Source: Hedgefund Intelligence
Bernard Madoff fraud in 2008200also contributed to the decline. A dding to this, fund of hedge funds 1,500
significantly underperformed hedge funds in 2009 with around 10% in returns 100
in 2009, much less than the 19% made by the hedge funds industry. 1,00002000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Sources: IFSL estimates
The breakdown of hedge funds of funds by manager location shows that arounda quarter of assets were managed from the UK. The US was the most popular
Chart 13 Single-manager hedge fund capitallocation with around 30% of the market. Switzerland, France and Hong Kong
provided by funds of hedge fundswere also important centres. To deal with the decline in assets many fund of
funds were forced to reduce management and performance fees in order to % share
attract new investments and retain existing customers. The number of 40publicly quoted hedge fund of funds has increased over the past decade. Most
35
of these listings are on the London and Zurich exchanges. The London Stock30
Exchange overtook Zurich in 2006 to become the location of choice for funds
of hedge funds listings. 25
20
Secondary market for hedge funds is a market where investors can buy into15
some hedge funds at a discount to net asset value. This is an OTC market where10
each deal is individually priced and structured. The secondary hedge funds
market allows investors to sell stakes in funds that have lockups or have 5
limited redemptions. It also lets others into funds that aren't accepting new 02000 2001 2002 2003 2004 2005 2006 2007 2008 2009
investors. As record investor redemptions swept over the industry in late 2008
and restrictions on redemptions imposed by some hedge funds increased, many Sources: IFSL estimates
investors turned to the secondary market to try to sell their stakes. In December
2009, Hedgebay, one of the leading players in secondary market-making forChart 14 Concentration of hedge fund
hedge funds, saw its global hedge funds secondary market index drop to a assetsrecord low, to just under 80% of the average net asset value.
% share, 2009
LARGEST HEDGE FUNDS 100
30%The hedge fund industry has become more concentrated at the top end over the 80past decade. With fund closures on the rise and new launches on the decline for
much of 2008 and 2009 consolidation intensified. The industry will probably 60 99%be characterised by a greater concentration of assets in the large funds in the
next few years. The top 100 hedge funds accounted for around 70% of total40
70%industry assets in 2009, up from 54% in 2003 (Chart 14). JP Morgan was the
largest hedge fund with $50bn under management in January 2010 (Table 2). It20
was followed by Bridgewater Associates $44bn and Paulson & Co $32bn. The
8% hedge fund attrition rate in 2009 was down on the previous year but much 1%0
higher than the 3% to 5% range seen over the previous 10 years (Chart 15). Funds Assets
Source: IFSL estimates
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Custody
Hedge fund assets are Table 3 Largest hedge fund prime brokers Table 4 Largest hedge fund administratorsgenerally held with a custodian,
end-June 2009including cash in the fund as well Jan-2009 Jan-2008 Growthfrom$bn% share % share 2008 (%)
as the actual securities. The flow Citco Fund ServicesGoldman Sachs 19.1 18.5 340 -9
of capital capital to meet margin State Street Altern. Invest. Solutions 208JP Morgan 18.8 - -14The Bank of New York MellonMorgan Stanley 13.5 20.0 159 7calls may also be controlled byGoldman Sachs Admin. Services 156UBS 6.9 7.8 -14
custodians. CitiDeutsche Bank 6.6 5.9 129 -14HSBC Securities Services 123Citigroup 5.5 4.2 -16SS&C Fund ServicesCredit Suisse 5.5 4.0 100 0Auditin
gMost hedge funds are
CACEIS Investor Services 84Newedge Financial 2.8 - -8set up in a way that does not GlobeOp Financial ServicesMerrill Lynch 2.7 2.9 81 -8require them to have their Fortis Prime Fund Solutions 81Others 18.6 36.7 -27
Source: Eurekahedgefinancial statements a udited. Source: HFN - Hedge Fund Administrator Survey
Some hedge funds however, may undergo annual audits if this is a part of the
contract between the hedge fund and its investors. This may however change if
regulation of hedge funds is tightened. Some offshore locations require hedge
funds to have their accounts audited.
Chart 18 Average margin requirementREGULATION OF HEDGE FUNDS
% margin requirement
The hedge fund industry has faced calls for stricter regulation in recent years.45
Although hedge funds did not play a major role in the emergence of the credit40
crisis it is alleged that they contributed to volatility through short-selling
transactions and selling shares as a result of deleveraging and redemptions. The 35
Financial Stability Board, successor to the Financial Stability Forum, was 30
established in April 2009 following the G-20 London summit. The oversight of 25
the new body was extended to all financial institutions important to global 20
financial stability including for the first time large hedge funds. 15
10
In the US, hedge fund managers have not been subject to regular SEC 5(Securities and Exchange Commission) oversight. Rule changes introduced by
the SEC in February 2006 that required hedge fund managers to register under 0Apr-05 Apr-06 Apr-07 Apr-08 Apr-09the Investment Advisers Act were overturned by the federal court in the same Oct-05 Oct-06 Oc t-07 Oct-08 Oct-09
Sources: Financial Services Authorityyear. Since then US hedge fund managers who registered with the SEC have
done so voluntarily. The Private Fund Investment Advisers Registration Act
2009 will make the registration of hedge fund managers in the US mandatory.
It will also subject hedge funds to new reporting and record keeping
requirements. In October 2009 the House Financial Services Committee voted Chart 19 Hedge funds use of leveragein favour of the Bill. The Bill will be presented to the House of Representatives
in 2010 and if it passes it will move onto the Senate and eventually to the Gross market exposure as a% of assets under management, end-year
President to sign into law.170
Domestic regulation of hedge funds varies across Europe. In April 2009, the160
European Commission published its proposal for a Directive on Alternative150
Investment Fund Managers (AIFMD) to establish EU-level regulation. It is
now being considered by both the European Parliament and the Council of 140
Ministers. The impetus for the Directive came from the G20 summit in London130
which set the path for hedge fund regulation, with G20 leaders agreeing that120
hedge fund managers should be registered by their national regulators and
should report systemically relevant data to those regulators. While the industry, 110
led by the global hedge fund body AIMA, is supportive of those goals, 1002000 2001 2002 2003 2004 2005 2006 2007 2008 2009
international concern has been expressed by the marketing provisions of theSource: Hennessee Group LLC, Financial Services Authority,
Directive which could effectively prevent non-EU funds and managers from IFSL estimates
accessing the EU market and thus prevent EU investors from investing outside
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April 2010 Hedge Funds
the EU. The Directive could be agreed this summer, although it would take:IFSL Researchseveral years to implement.
Report author: Marko MaslakovicUK hedge fund managers and advisors are typically required to seek
Director of Economics: Duncan McKenzie
authorisation from the Financial Services Authority (FSA). The regime for [email protected] +44 (0)20 7213 9124hedge fund managers in the UK is similar to that which applies to otherSenior Economist : Marko Maslakovic
investment managers. They are able to take advantage of the [email protected] +44 (0)20 7213 9123
Services Directive which allows them to offer their investment services toInternational Financial Services London
clients in other countries within the EEA. The FSA oversees a group of the 29-30 Cornhill, London, EC3V 3NFlargest hedge fund managers from within a specialist supervisory team. The www.ifsl.org.uk
FSA also specifies restrictions on sales and marketing of hedge fund ------------------------------------------------------
products. Hedge fund products for example, cannot be marketed to the International Financial Services London (IFSL) is a privatesector organisation, with nearly 40 years experience of
general public but UK investors can deal directly with offshore funds.successfully promoting the exports and expertise of UK-based financial services industry throughout the world.
Offshore hedge funds are registered in tax neutral jurisdictions allowingThis report on Hedge Funds is one of 16 financial sectorinvestors to minimise their tax liabilities. Offshore hedge funds are usuallyreports in IFSLs City Business Series.All IFSLs reports
canstructured as corporations although may sometimes be limited partnerships.
be downloaded at www.ifsl.org.uk.Generally the number of investors is not restricted. Onshore hedge funds
Copyright April 2010, IFSLoften set up a complementary offshore fund to attract additional capital
without exceeding limits on the number of investors. The vast majority ofData filesoffshore funds are registered in the Cayman Islands followed by the British
Virgin Islands and Bermuda (Chart 17). Datafiles in Excel format for all charts and tables publishedin this report can be downloaded from the Reports section of
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