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FIVE YEAR SURVEY OF OFFSHORE HEDGE FUNDS SHOWS BREAK IN TREND FOR LARGE FUNDS IN 1998
 

By Antoine Bernheim, Publisher

Each year, upon the publication of the new edition of The U.S. Offshore Funds Directory, we analyze the major trends revealed by the statistical analysis of the data contained in the Directory. While several trends noted in prior years persisted in 1998, such as the growth in the number of funds, the broadening of the distribution of capital among funds and a casualty rate within historical norm, there was also a significant change related to the efficiency of the allocation of capital among funds. Throughout the '90s, figures showed that a breakdown by fund size paralleled performance such that the funds that had become largest had indeed continued to outperform the smaller ones. We analyzed this in last year's survey. In 1998, however, this positive relationship between asset size and performance did not persist. Dividing the offshore hedge fund world into three size categories based upon year-end 1998 capital (funds with capital in excess of $1 billion, between $100 million and $1 billion and under $100 million), the average return of the smaller funds (13.3%) was about twice the average of the larger funds (6.5%) with the middle category in-between (9.7%). The differences in median return for the three categories were not statistically meaningful and did not depart from the median return of the entire sample of 8.0%. The extent of losses at some large hedge funds had the effect of dragging down the capital weighted return to a negligible 1.7% that is so far from the return of the S&P 500 (28.6%) that investors have been pondering whether or not hedge funds are really worth it. In our February 1999 issue, we presented the performance distribution of the 50 largest hedge funds (offshore and domestic). The analysis showed that 9 out of the 50 had losses of 25% or more (10 out of the 50 had gains in excess of 25%). Massive losses at a few large hedge funds were caused by a temporary dysfunction of the fixed income markets and the collapse of major emerging markets in which many of the larger hedge funds often had some exposure. The impact of these factors in the wider sample of offshore hedge funds is likely to raise concern on the part of investors and managers regarding the relationship between asset size and return.

1999

1998

1997

1996

1995

Single Manager Funds @BOY

494

449

376

309

249

Capital @ BOY (in $ billion)

$76.7

$73.4

$51.9

$36.9

$31.7

Funds with BOY capital > $100M

122

111

82

52

47

5 largest funds as % of total

24.4%

29.4%

35.4%

42.9%

38.9%

Funds opened during year

114

106

80

70

Funds closed during year

40

27

27

29

Capital weighted rate of return

1.7%

25.0%

20.3%

20.3%


The performance gap between the capital weighted return and the S&P 500 is unprecedented. Even in 1994 when many large hedge funds lost money in the bond market, the gap was approximately 10 points vs. 27 in 1998. As a result, return statistics over multiple calendar years put the offshore hedge funds far behind the S&P until one goes back 8 years or more. Another way to illustrate this unprecedented circumstance is the following observation: while a number of hedge funds have beaten the S&P 500 over the nine years of the current decade or longer, of those that have actually beaten the S&P500 over the last five years, only two were in existence in 1990.


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

8 years

Hedge Funds

1.7%

15.2%

10.9%

20.2%

S&P 500

28.6%

27.9.%

23.9%

20.7%


In spite of this unflattering performance, capital in offshore hedge funds reached a new high in 1998 with a $3.3 billion (4%) increase over 1997. The buoyant results of 1997 created inflows in the first half of 1998 which were roughly matched by similar size outflows in the last quarter of 1998. The number of offshore hedge funds continued to grow in 1998 by just under the 20% rate of the recent years. Our sample shows a net increase of 74 single manager funds in 1998 versus 79 in 1997 and 53 in 1996. The total number of funds included in the survey (494) did not increase as much as a result of a number of managers who did not wish to be listed in the 1999 Directory but are still operating.

Other factors worth noting include the continued diversification of capital with the five largest funds accounting for 24% of total capital vs. 29% in 1997 and more than 50% in years prior to 1993. The number of funds with capital in excess of $100 million has remained at the 25% level achieved in 1997 (vs. an average of 20% in prior years) and accounting for 87% of total capital. The number of offshore hedge funds with capital in excess of $1 billion remained at 14, accounting for 40% of total capital (vs. 45% in 1997). Funds closed in 1998 represented 9% of the total, a figure similar to that of 1996 but up from the low 7.2% achieved in 1997. The casualty number in 1994 was substantially higher. As a result, after a year of lost opportunity, there are more investors and managers than ever who stand ready and optimistic for a better environment. uA.B.

 
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