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OFFSHORE HEDGE FUNDS: A DECADE OF EXCEPTIONAL GROWTH SPLIT INTO TWO PARTS
 
The publication of the eleventh annual edition of The U

The publication of the eleventh annual edition of The U.S. Offshore Funds Directory gives us the opportunity to review the development of the offshore hedge fund world over the decade just ended. During that period, what began as an elite club of aficionados of George Soros, Michael Steinhard, Bruce Kovner and Paul Tudor Jones has developed into a diversified and fast growing offering of investment products. At the beginning of the decade, five managers accounted for 55% of the capital in offshore hedge funds. During the 90s, as the number of offshore hedge funds increased consistently at a 20% annual rate, investors proceeded to diversify their capital allocation such that today, the top five managers only represent 20% of the capital.

2000

1999

1998

1997

1996

Single Manager
Funds @BOY

609

494

449

376

309

Capital @ BOY
(in $ billion)

$113.0

$76.7

$73.4

$51.9

$36.9

Funds with BOY
capital > $100M

164

122

111

82

52

5 largest funds
as % of total

20.5%

24.4%

29.4%

35.4%

42.9%

Funds opened
during year

200

114

106

80

Funds closed during year

49

40

27

27

Capital weighted
rate of return

25.8%

1.7%

25.0%

20.3%

Of the five largest funds at the beginning of the 90s, three remain among the ten largest today and two closed their funds during the decade. Over the period, significant new capital went into hedge funds, although capital movements were marked by ebbs and flows with a peak (relative to the capital base) coming on the heels of an exceptional performance in 1993. That was followed by losses and significant redemptions in 1994 when we entitled our year-end review at the time as "The Big Shrink". Overall, capital in offshore hedge funds increased during the decade at an annual rate of 29%, with approximately two thirds of the growth coming from performance and the balance from net capital inflows.

At the beginning of the decade, there were only 14 offshore hedge funds with capital in excess of $100 million, representing 16% of the total number of funds in our universe. Eleven of them were still operating ten years later. At the beginning of 2000, there were 164 offshore hedge funds with capital in excess of $100 million, representing 27% of the number of funds. Those funds with $100 million or more in assets consistently account for approximately 87% of the total capital. While the pyramid of the industry widened considerably, the spectacular growth in number of funds was accompanied by a number of failures. The attrition rate among offshore hedge funds has ranged between 7% and 17% over the decade with the high point reached in 1994. In 1999, 10% of the funds in existence at the beginning of the year closed during the year.

Hedge funds were propelled to the forefront of the investment scene by the dramatic performance of large hedge funds in the early nineties, well above that of the equity markets as shown in the table below.

Offshore hedge funds

S&P
500
incl. div.

1990

20.0%

-3.1%

1991

32.3%

30.4%

1992

37.3%

7.6%

1993

43.1%

10.1%

In the second half of the decade, as US equities roared ahead, hedge fund investors did not keep up with the indices. This split experience is evidenced by the table below which shows the difference in performance over the most recent years compared to the entire decade.

Offshore Hedge Funds vs. S&P 500
Annual compound rate of return over calendar years
(weighted by capital at the beginning of each year)

1 year

3 years

5 years

10 years

Hedge Funds

25.8%

16.9%

18.3%

20.7%

S&P 500

21.0%

27.6%

28.6%

18.2%

As we begin the new millennium, there are many talented hedge fund managers to allocate assets to and the process is also more difficult than it used to be because so many more managers compete for investors' attention. The explosion in product offering and the diversification of investors' portfolios have turned both the selection of fund managers and the maintenance of portfolios into a time consuming effort of data and intelligence gathering, analysis and due diligence. Many managers still favor secrecy over investor friendliness and have yet to adapt to the complexity of the marketplace which requires that the delivery of routine information be streamlined to existing and potential investors. Hopefully, the efforts developed by a few, including ourselves, will facilitate communications amongst all members of this growing hedge fund community. A.B. u

 
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