Hedge funds grow amid volatility as funds of funds continue downward trajectory, PerTrac data shows

29 Aug, 2012

Single manager hedge funds saw AuM increase by 5.23% to $1.9 trillion during the first half of 2012 although funds of funds’ woes continued, according to a study by PerTrac, a data provider.

Money flowing into hedge funds and out of funds of funds

Funds of funds’ AuM fell by 4.92% to $425 billion amid ongoing poor performance and pressure from investment consultants. S&P Capital IQ Fund Research, another data provider, recently issued a report stating 90% of funds of funds would be considered “ungradable” had their performance been measured against absolute as opposed to relative return benchmarks.

The number of single hedge funds reporting their data to PerTrac increased by 7.46% bringing the total to 10,754 funds. PerTrac said the majority of these new funds were small managers or start-ups running less than $25 million in AuM.

Commentators have predicted an increase in start-ups as investment banks spin out their proprietary trading desks in accordance with the Volker Rule. Nevertheless, capital raising for these start-ups remains tough. A Citi Prime Finance survey highlighted just $5.6 billion of capital flowed into 352 start-up hedge funds in 2011,

Institutional investors’ ongoing love-affair with the largest managers continued. Single manager hedge funds running more than $1 billion saw their collective AuM increase from $1.08 trillion to $1.15 trillion. According to PerTrac, these $1 billion plus managers account for 60.6% of all assets invested in single manager hedge funds. Funds of funds running more than $1 billion also dominated. PerTrac data showed 48.7% of AuM invested in funds of funds was controlled by the 3.24% of firms managing more than $1 billion.

This is mainly down to institutional investors’ reluctance to allocate to smaller managers due to binding concentration limits and risk criteria. A survey by J.P. Morgan’s capital introductions group revealed 67% of pension funds and 57% of insurance companies will only consider managers with a minimum AuM of $250 million.

Commodity Trading Advisors (CTAs) have also seen a healthy gain in assets of 6.05% in 2012 bringing total AuM to $438 billion. The number of CTA funds has risen by 1.26% since 2011 bringing the total to 1,528.  Of that number, 45 CTAs manage more than $1 billion accounting for 78.1% of the sector’s AuM.  CTAs have grown in popularity among investors as they tend to be uncorrelated to other asset classes and have delivered consistent returns during bouts of market volatility.

Citifunds of fundsJ.P. MorganPerTracVolker Rule