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TOP 50 HEDGE FUNDS: ARE HEDGE FUNDS BEING PULLED DOWN BY THEIR OWN WEIGHT?
 

By Antoine Bernheim, Publisher. This article appeared in the February 2004 issue of Hedge Fund News?.

In our survey of the 50 largest hedge funds a year ago, we noted that hedge funds, particularly the large ones, had responded to the increasingly institutional nature of their investors by lowering their risk profile. We concluded on the emergence of a two-tier industry with "managers catering primarily to traditional hedge fund investors, seeking to maximize performance and limiting capacity, while others aim at lower returns and emphasize the consistency needed to satisfy the requirements of their more recent, large investors." Increasingly, our survey of the 50 largest hedge funds becomes tilted toward the latter type of hedge funds and the results for 2003 show good but much lower than equity returns in spite of a series of strong opportunities not only in equities, but also in distressed securities, emerging markets and currencies. Among those few that did very well with returns in excess of 30%, most were recovering from losses in 2002 and, while staying within the top 50, had typically slimmed down as a result of capital withdrawals at the end of 2002. In addition, since 1997, the largest hedge funds had consistently and at times significantly outperformed the broad hedge fund universe whether equity markets offered outstanding opportunities for gains (1997-1999) or losses (2000-2002). This was not the case last year. The median return to investors among the top 50 was 14.3% and the net return weighted by capital was 12.9% (compared to the 14.5% median return for 2003 of single manager offshore hedge funds reported as of this writing on hedgefundnews.com). In 2003, 47 among the top 50 were profitable and 3 had losses.

2003 results of the 50 largest hedge funds

2003 Net Return after all Fees

Number of Hedge Funds

Capital @
1/1/04 in
$ million

Capital @ 1/1/03 in
$ million

> 30%

7

20,670

14,888

20% to 30%

7

35,459

24,503

15% to 20%

8

32,468

21,990

10% to 15%

14

45,133

38,731

0% to 10%

11

43,508

40,100

<0%

3

10,400

15,212

Total

50

187,638

155,424

THE TOP 50 MEDIAN STATISTICS

Median Equity

Median

Return

S&P 500

2003

$3.00B

14.3%

28.7%

2002

$2.40B

5.0%

-22.1%

2001

$2.50B

11.5%

-11.9%

2000

$1.70B

12.5%

-9.1%

1999

$1.90B

32.4%

21%

1998

$1.39B

9.5%

28.6%

1997

$1.27B

20%

33.4%

1996

$0.60B

21%

22.9%

Assets under management rose by 21%, compared to 11% reported in 2002 in the same survey. Approximately two thirds of the increase in assets came from performance and one third from net capital inflows. We estimate that 30 of the 50 largest hedge funds raised $24 billion in new capital and, among those, the median figure for capital raised represented 18% of capital at the beginning of the year. The other 20 hedge funds in our survey had net withdrawals of $12 billion and, among those, the median figure for capital withdrawn represented 13% of their capital at the beginning of the year. Our survey indicates that seven hedge fund groups raised capital in excess of $1 billion in 2003 compared to five in 2002 and eight in 2001. Three funds voluntarily returned capital in excess of $1 billion to their investors. For the third year in a row, no hedge fund organization reported assets in excess of $10 billion. The 50 largest hedge funds generated net profits to investors of approximately $20 billion and $6 billion in incentive compensation to managers.

As institutional investors look to hedge funds to provide diversification to their risk in equities, they are more concerned about making money when equity markets are poor than outperforming strong equity markets. Large hedge funds have responded in turn to these parameters. This reflection of the investor make-up on the investment policy is likely, over time, to water down the performance of most large hedge funds compared to those which favor a smaller scale with investors that accept the manager?s risk profile rather than the other way around. u

 
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