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THE RETURN OF THE HEDGERS
 
For the second year in a row, hedge fund investors handily outperformed the S&P 500, closing the wide gap opened in 1998

By Antoine Bernheim, Publisher. This article appeared in the February 2001 issue of Hedge Fund News┐.

For the second year in a row, hedge fund investors handily outperformed the S&P 500, closing the wide gap opened in 1998. In 1999, many hedge fund managers benefited from momentum investing by incorporating new economy themes into their portfolio. In 2000, the dominant factor in the equity markets was a return to a more rational pricing system which is generally favorable to the fundamental type of analysis practiced by the majority of hedge funds. Hedge fund managers may not have anticipated the first shock that shook the NASDAQ in the early spring but, as good information processing machines, they were generally much better positioned for the continuing weakness of the all important tech sector in the last few months of the year. Even among the large tech-oriented hedge funds, many were able to protect themselves, in spite of their size, when the mega-cap tech stocks began to decline significantly in the second half of the year. Long/short fundamental investing generally performed very well both in the U.S. and in Europe where markets proved to be a fertile ground for a fundamental and event-driven approach. Japan was not so forgiving and the popularity of Asian oriented hedge funds came to a halt. Arbitrage strategies also contributed to the strong hedge fund showing as did many funds with a short-term trading orientation, particularly well suited to the exceptional volatility of equities or to control risk when trading macro instruments. Credit spreads widened to unusual levels, creating difficulties for many distressed securities funds as well as private convertible investors.

The results of our annual confidential survey of what we believe to be the fifty largest hedge funds reflect the overall good performance of hedge funds relative to stock indices which was also evident throughout the year in the progression of our own index, up 5.7% in 2000 (see www.hedgefundnews. com for details). There was also a relatively wide distribution of returns above and below the zero line, not unlike that experienced in 1998, which caused a wider than usual range of performance among funds of funds with several of the more established funds ending the year with negative results, albeit better than the S&P .

2000 results of the 50 largest hedge funds

2000 Net Return after all Fees

Number of Hedge Funds

Capital @
1/1/01 in
$ million

Capital @ 1/1/00 in
$ million

> 35%

6

17,472

9,953

25% to 35%

7

22,474

13,905

15% to 25%

10

23,336

17,316

5% to 15%

9

21,523

18,151

0% to 5%

8

16,781

22,025

0% to -15%

5

10,232

11,808

<-15%

5

6,182

12,369

Total

50

118,000

105,527

Overall, net capital inflows among the largest hedge funds were small with 27 of the funds having net capital additions and 23 having asset withdrawals of almost a similar aggregate amount. For the first time since we have been doing this survey, the median size among the top 50 hedge funds actually declined from the prior year, in spite of the overall positive performance. This is primarily the result of capacity constraints coming into play as funds get over a certain mark, generally between $500 million and $1 billion. The composition of the group has changed significantly since we did our first such survey five years ago and half of the funds in the original group have dropped out. Seven of those included five years ago have ceased to exist, while ten in this year's group had not yet started five years ago. Each year, the top ten consistently show assets under management exceeding twice the median equity.

THE TOP 50 MEDIAN STATISTICS

Median Equity

Median

Return

S&P 500

2000

$1.70B

12.5%

-9.1%

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 growth in the number of funds and the acceleration of the capital raising process has vastly expanded the opportunities for institutional investors in the universe below the top fifty. Another contributing factor has been the diversified product strategy followed by many large hedge funds to lower the risks associated with their revenue stream and promote the development of management talent. The continuing explosion in product offering is a challenge to investors and one of the reasons behind the success we have had this past year in the expansion of our own web-based listing services. u

 
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