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HEDGE FUNDS END THE MILLENNIUM WITH A BANG
 
In 1999, hedge fund investors had their best year since 1993 both on an absolute basis and relative to the S&P500

By Antoine Bernheim, Publisher. This article appeared in the February 2000 issue of Hedge Fund News¿.

In 1999, hedge fund investors had their best year since 1993 both on an absolute basis and relative to the S&P500. Hedge fund assets grew to record levels and the aggregate growth came entirely from performance as redemptions exceeded capital inflows. Those are the main conclusions of our annual confidential survey among the 50 largest hedge funds.

Hedge fund investors benefited greatly from the capital flow toward the new information economy, spectacular Asian equity markets and strong European equities. Emerging markets, an asset class deemed moribund after 1998, also had an exceptional finish. However, the broad based hedge funds generally stayed away from emerging markets so that only emerging markets oriented hedge funds participated in this recovery. Trading advisors using trend-following models generally had a very poor year and few macro players profited from the significant currency moves. The last two months of the year provided unusual fuel to hedge fund portfolios: through October, the Bernheim Index¿ composed of 18 leading hedge funds was up 10.3% (vs. 10.9% for the S&P500) but over the succeeding two months, it climbed to a 29.5% gain (vs. 21% for the S&P500), certainly illustrating Peter Lynch's famous remark that "missing 10% of the time in the stock market is the surest way to transform a stock market return into a money market return".

1999 results of the 50 largest hedge funds

1999 results of the 50 largest hedge funds

1999 Net Return after all Fees

Number of Hedge Funds

Capital @
1/1/00 in
$ million

Capital @ 1/1/99 in
$ million

> 75%

8

17,120

7,667

50% to 75%

8

18,173

10,476

35% to 50%

7

12,444

8,554

20% to 35%

12

38,032

30,829

15% to 20%

5

8,039

7,115

0% to 15%

7

15,672

12,084

<0%

3

10,100

18,200

Total

50

119,580

94,925

Because so much of hedge fund performance came in the last few weeks of the year, net capital flows into hedge funds over the entire year were actually negative, in spite of all the talk about interest in hedge funds from large institutional capital sources. In the early part of 1999, investors were still reacting to the volatile results of 1998. As the market stabilized further into the year, investors reallocated capital to newly formed funds as opposed to hedge funds which had very solid long term records except perhaps for a hiccup in August 1998 or, amongst some Asian oriented funds, the effect of the 1997 crisis. Our analysis shows that among the fifty largest hedge funds, sixty percent had total net redemptions of $15 billion while forty percent had total net inflows of $7 billion. Because of performance, eighty-six percent of the funds sampled ended the year with more assets than they had at the beginning. There were seven substitutions from last year's sample. Apart from the new start-ups which did well in the 1999 environment (several funds were launched with $300 to $500 million), existing hedge fund organizations only raised sizable amounts of capital through new product offerings (for instance, technology hedge funds developing private equity funds and cross-over funds) or by undertaking a concentrated capital raising program through one of the major investment banks. Also, several funds generally closed to new capital attracted significant inflows through a one time opening.

THE TOP 50 MEDIAN STATISTICS

Median Equity

Median

Return

S&P 500

1999

$1.90B

32.4%

21.0%

1998

$1.39B

9.5%

28.6%

1997

$1.27B

20%

33.4%

1996

$0.60B

21%

22.9%

The real story of 1999 was the demonstration by hedge fund managers of their collective ability to embrace a dominant investment theme whether or not it is part of their original expertise or style. Many value players and top-down managers found a way to incorporate in their portfolios the forces of change arising from new technology, telecommunications and media. Many growth stock managers radically and successfully changed the orientation of their portfolios from just a year or two ago. While these forces are secular in nature and still at the beginning of a profound transformation, history has also shown that caution is paramount when the entire investment world is going one way. As the year ended on such a high note, we cannot but recall 1993 when so many hedge funds reaped exceptional benefits from venturing into European bonds and emerging markets. The crowding of these markets led to a serious set back in 1994 when managers could not reach for the exit soon enough. We are hopeful that many experienced hedge fund managers will know how to use the lessons of the past in the months ahead. u

 
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