Hedge fund AuM reaches new record

22 Jan, 2014

Hedge fund Assets under Management (AuM) surged to a new record during the last quarter of 2013 to reach $2.63 trillion, according to data from the Chicago-based Hedge Fund Research.

Total hedge fund capital increased by $376 billion in 2013 as the average manager generated returns of 9.2%, the best performance since 2010, said Hedge Fund Research. Meanwhile, Preqin, another data provider, also said global hedge fund AuM had reached $2.6 trillion with 83% of managers feeling confident this will increase further in 2014. Preqin added 84% of investors felt hedge funds had either met or exceeded their return expectations, levels not seen since before the financial crisis.

Event-driven hedge funds saw the largest inflows growing by $140 billion to $698 billion, surpassing relative value arbitrage as the second largest strategy by AuM, said Hedge Fund Research. Event driven strategies performed well in 2013 with gains of 12.5%, their best performance since 2009.

Equity hedge funds grew by $136 billion with the strategy now managing a record $734 billion. These flows come as the strategy delivered its best performance since 2009 with gains of 14.4%. Meanwhile, macro funds suffered outflows of $13.3 billion during the fourth quarter of 2013 with systematic funds and commodity trading advisors (CTAs) experiencing the bulk of redemptions. Macro strategies have performed badly over the last few years, and 2013 was no exception with the average macro manager posting losses of 0.2%.  “A lot of investors have given up on CTAs after three years of decline,” said Kenneth Heinz, president of Hedge Fund Research.

Investor preferences for large managers continued with roughly $40 billion flowing into hedge funds running in excess of $5 billion, while $7.2 billion was allocated to sub $1 billion managers.  This comes amid the institutionalisation of investors – the Preqin study found 65% of industry capital now derives from institutional pockets with public pension plans accounting for 22.4% of institutional assets invested in hedge funds. Many of these allocators are bound by stringent risk and concentration criteria, which means they cannot invest in smaller managers, broadly defined as those running less than $500 million.

The challenges facing smaller hedge funds are well documented as investors increasingly demand institutional standard operational infrastructure while the costs of regulatory compliance have jumped exponentially.  Investors are also exerting downward pressure on fees – Preqin found the mean hedge fund management fee for funds launched in 2013 stood at 1.54% compared to 1.70% for firms launched in 2007.

A Citi Prime Finance study, published in December 2013, said hedge funds needed to run at least $300 million in AuM to enable their management fee to pay for their operating costs and regulatory requirements. “The days of two guys and a Bloomberg launching a hedge fund are over. It is very difficult to launch a fund today, particularly given that the 2% management fee and 20% incentive fee is no longer the industry norm,” commented Heinz.

The growth of regulated or liquid alternatives such as ’40 Act hedge funds is also an area of excitement, added Heinz. “This is an exciting area for alternatives because it enables managers to broaden their investor base as they can now tap retail capital,” said Heinz. A Barclays Prime Services study found 29% of allocators planned to add regulated or liquid alternatives to their portfolios in 2014, a 6% increase from 2013. A number of service providers are bullish on the future of liquid alternatives.  Citi Prime Finance itself said it expected $939 billion of the $12.8 trillion in retail assets available to flow into liquid alternatives by 2017. 

One of the key investor targets among managers running regulated alternatives is the Defined Contribution (DC) pension plan market. A report by SEI said 60% of the DC plan market’s $5.1 trillion in assets were parked in mutual funds, adding this investor class had historically been averse to alternatives. The SEI report said plan sponsors had become emboldened and were increasingly investing in real estate, inflation protected treasuries and commodities in search of greater yield.

40 Act hedge funds are not without their challenges. While the distribution benefits are hard to falter, 40’ Act hedge funds are subject to onerous restrictions. The absence of leverage (capped at 33% of gross assets), lack of performance fees (with a management fee of between 70 bps and 1%), restrictions on investing in illiquid assets (capped at 15% of AuM), rigorous corporate governance standards and mandatory third party custody will all lead to higher compliance costs, at a time when profits are rapidly receding. These costs could also make it unsustainable for smaller hedge funds to launch regulated products.


Hedge Fund ResearchPreqinCiti Prime FinanceBarclaysSEI40 Act Funds