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THE GREAT LOVE AFFAIR WITH HEDGE FUNDS: OFFSHORE HEDGE FUNDS ASSETS UP 28% IN 2001
 
The exceptional growth in offshore hedge funds assets, initially documented in our mid-2001 survey of offshore administrators (see Hedge Fund News, August 2001) is confirmed by the analysis of the data from the thirteenth annual edition of The U

By Antoine Bernheim, Publisher. This article appeared in the May 2002 issue of Hedge Fund News┐.

The exceptional growth in offshore hedge funds assets, initially documented in our mid-2001 survey of offshore administrators (see Hedge Fund News, August 2001) is confirmed by the analysis of the data from the thirteenth annual edition of The U.S. Offshore Funds Directory published last month.

2002

2001

2000

1999

1998

Single Manager
Funds @BOY

737

647

609

494

449

Capital @ BOY
(in $ billion)

$150.4

$117.6

$113.0

$76.7

$73.4

Funds with BOY
capital >$100M

265

204

164

122

111

5 largest funds
as % of total

15.3%

16.6%

20.5%

24.4%

29.4%

Funds opened
during year

171

140

200

114

Funds closed during year

58

58

49

40

Capital weighted
rate of return

5.9%

7.1%

25.8%

1.7%

Offshore hedge funds assets grew by 28% in 2001 and have doubled in the last three years, during which time the number of single manager funds has grown by 50%. Offshore hedge fund assets have consistently doubled every three years since we began tracking the data in 1991, but only recently has the asset base grown to a level where hedge funds are a main stream product offered to an increasingly large audience. Nothing explains investors' recent love affair with hedge funds better than the comparison with the performance of the S&P500 over the past three years, with hedge funds boasting a double digit annual compound rate of return vs. a slight decline of the equity index. Given the poor performance of equities and low interest rates in the U.S., Europe and Japan, hedge funds have become the product "du jour" and funds of funds are sold as the holy grail in getting equity-like return without equity risk.

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

5.9%

12.6%

12.6%

16.7%

S&P 500

-11.9%

-1.0%

10.7%

12.9%

The hedge fund world has always been characterized by high turnover but capital movements are accelerating. Typically, during any three year period, for every 100 funds in existence at the beginning of the period, 100 new funds are created and 50 go into oblivion during the period. What has changed recently is the rising percentage of investors' capital going into less seasoned hedge funds as many established funds close to new capital and capacity limitations cause investors to make large commitments at an increasingly early stage of a fund's life. In 2001, the 28% growth rate in capital of the offshore hedge fund universe dwarfed the 18% growth rate of the 50 largest hedge funds which have a relatively long history (see HFN February 2002 issue). As a result, we now find an increasing number of large funds with relatively short histories: in fact, 40% of the offshore hedge funds in the $500 million to $1 billion range have less than five years of existence. As funds grow, sometimes too quickly, investors can be disappointed by the deteriorating results after the couple of years of good performance upon which they relied to make their investment. The acceleration of capital inflows is matched by sudden large outflows when funds encounter difficulties after a short period of success and investors without much accumulated profits withdraw capital more quickly than before.

Another source of concern is that hedge funds are beginning to crowd the trading activity of the equity markets. Among long/short equity funds, the good performance of many is counter-balanced by others' losses, producing mediocre overall returns for investors. As long as equities behave poorly and interest rates remain low, the love affair for hedge funds can endure but overly optimistic expectations based on a past when hedge funds operated on the margin of the equity markets are likely to be disappointed. u

Offshore Hedge Funds
Industry Structure

(as of 1/1/2002)

Category of fund size

% of number of funds

% of total capital

Average size by category (in $M)

<$100M

64%

10%

32

>$100M and <1,000

32%

47%

306

Over $1B

4%

43%

2,269

 
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