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OFFSHORE HEDGE FUNDS: INDUSTRY GROWTH CONTINUES AT A SLOWER PACE IN 2000
 
The publication last month of the twelfth annual edition of The U

The publication last month of the twelfth annual edition of The U.S. Offshore Funds Directory gives us again the opportunity to update our five-year survey and look at the state of the offshore hedge funds industry.

Since 1998, when hedge funds became synonymous with a systemic risk to the financial world, two years of superior relative performance have changed perceptions and enabled hedge funds to take a more secure place in the realm of financial products, with institutional participation on both the buy and sell sides. The offshore hedge funds industry which continues to occupy the larger share of the hedge fund world has itself reached a more mature stage .

2001

2000

1999

1998

1997

Single Manager
Funds @BOY

647

609

494

449

376

Capital @ BOY
(in $ billion)

$117.6

$113.0

$76.7

$73.4

$51.9

Funds with BOY
capital > $100M

204

164

122

111

82

5 largest funds
as % of total

16.6%

20.5%

24.4%

29.4%

35.4%

Funds opened
during year

140

200

114

106

Funds closed during year

58

49

40

27

Capital weighted
rate of return

7.1%

25.8%

1.7%

25.0%

Hedge funds are naturally affected by the broad trends of the financial markets and the cold shower encountered by equities since the second half of 2000 had a dampening impact on them, in spite of their relative good performance. While the growth in the number of funds and aggregate capital continued in 2000, the pace was markedly reduced. Against a 20% annual growth rate over the past ten years, the number of funds increased by only 6% in 2000, the lowest level since 1990 when we began to track these numbers. Even in the difficult years for hedge funds of 1994 (when total capital in offshore hedge funds actually declined) and 1998, our surveys showed growth in number of funds of 26% and 10%, respectively. Net capital flows were also subdued as the outflows from a few very large funds were reallocated to many more smaller funds. Among the funds which were in existence for the entire year of 2000, 53% had inflows and 47% had outflows of almost similar magnitudes. This is consistent with the results of our survey of the largest hedge funds published in our February issue which encompassed both the on-shore and offshore components of the hedge fund world. New funds started in 2000 attracted capital representing, in the aggregate, approximately 4% of the total capital in offshore hedge funds, a major increase over prior years due to a number of big launches by star managers, either independently or within institutions, as well as the significantly larger pool of capital ready to back new ventures in exchange for equity. Approximately 10% of the funds in existence at the beginning of 2000 closed during the year, an attrition rate comparable to 1999 and in line with the average of the past ten years. However, the capital involved in these fund closures was much larger than usual, representing more than 6% of the total capital in offshore hedge funds. These capital flows contribute to the continuing diversification of hedge funds investors' assets, which we have pointed out on numerous occasions as a major long-term trend within the industry. As of the beginning of 2001, it took approximately 36% of the funds to account for 90% of the total capital vs. 27% five years ago. The 50 largest funds in our universe have been in existence an average of 7 years (the median is 6 years) with a range of 1 to 31 years. Within this group of large funds, half of the 20% most recently-created funds (in existence for 1 to 3 years) were London-based.

Offshore Hedge Funds
Industry Structure

(as of 1/1/2001)

Category of fund size

% of number of funds

% of total capital

Average size by category (in $M)

<$100M

68%

11%

30

>$100M and <1,000

28%

45%

288

Over $1B

4%

44%

2,241

In terms of returns, the good relative results of 1999 and particularly 2000 are almost making up for the huge gap created with the S&P500 in 1998, as shown in the three and five year comparative returns in the table below.

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

7.1%

11.1%

15.6%

19.4%

S&P 500

-9.1%

12.3%

18.3%

17.4%

 
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