Introduction
The North American hedge fund industry has witnessed some significant trends since year 2000. At the turn of the millennium, the sector accounted for more than 84% of the global hedge fund industry with US$258 billion in assets managed by 1,815 managers. Over the next eight and a half years, the sector witnessed exponential growth with assets under management peaking in June 2008 at US$1.247 trillion – an increase of nearly 500%. The fund population also increased significantly to cross 4,600 funds over the same period.
However, during the second half of 2008 and early 2009 the industry suffered massive redemptions and significant performance-based losses, causing assets under management to fall to US$849.2 billion by April 2009. This period also witnessed a large number of hedge fund managers closing shop and the number of funds fell to 4,453 funds by end-June 2009. Despite the falling markets and record redemptions, the average North American manager witnessed losses of 9.31% in 2008 which can be seen as a significant outperformance to the underlying markets. The subsequent turnaround in global markets and return of investor confidence set the stage for a remarkable recovery in the North American hedge funds sector.
Excellent performance-based gains and positive net flows in the last three quarters of 2009 were followed by a period of consolidation in 2010 and 1H 2011. North American hedge funds have posted the strongest and most sustained recovery among all hedge fund regions. As at end-May 2011 the assets under management stand at US$1.2 trillion, just below the historical high.
The growth in the number of hedge funds and the assets under management in North American hedge funds since 2000 can be seen in figure 1.
Figure 1: Industry growth since 2000
Industry composition and growth trends
The following pages discuss asset flows in the North American industry in greater detail while also looking at the changes in the industry over the years in terms of fund population, strategies employed, geographical mandates and manager locations.
Asset flows
North American hedge funds have continued to enjoy strong asset flows in the first five months of 2011, gaining a total of US$74.5 billion through the healthy allocation activity so far in the year. The sector has witnessed 16 consecutive months of net positive asset flows since February 2010, making it a total of US$134.7 billion gained through net inflows over this period. This is not only a result of excellent performance in 2009 and 2010, and the significant downturn protection in 2008, but also due to various measures undertaken by managers to placate investor concerns. These include addressing issues such as counter-party risk by diversifying their prime broker relationships, engaging reputable third-party administrators, increased transparency and redemption frequency. The changes undertaken by managers coupled with new regulatory regimes, had the effect of rebuilding investor confidence, resulting in the significant asset flows witnessed by North American hedge funds.
Table 1: Monthly asset flows in North American hedge funds
Month
|
Net Growth (Performance)
|
Net Flows
|
Assets at end
|
Jan-09
|
6.7
|
(63.2)
|
918.6
|
Feb-09
|
(3.1)
|
(12.6)
|
902.8
|
Mar-09
|
(1.2)
|
(25.6)
|
876.1
|
Apr-09
|
7.5
|
(34.4)
|
849.2
|
May-09
|
22.6
|
1.1
|
872.9
|
Jun-09
|
(0.0)
|
7.2
|
880.1
|
Jul-09
|
13.4
|
(0.4)
|
893.1
|
Aug-09
|
7.9
|
10.9
|
911.9
|
Sep-09
|
16.7
|
13.3
|
941.9
|
Oct-09
|
0.5
|
5.1
|
947.5
|
Nov-09
|
11.1
|
4.5
|
963.1
|
Dec-09
|
6.4
|
(6.6)
|
962.9
|
2009
|
88.5
|
-100.7
|
962.9
|
Jan-10
|
(1.3)
|
(2.6)
|
959.0
|
Feb-10
|
3.2
|
17.5
|
979.6
|
Mar-10
|
16.2
|
0.3
|
996.2
|
Apr-10
|
10.1
|
1.5
|
1007.8
|
May-10
|
(18.2)
|
6.5
|
996.1
|
Jun-10
|
(1.5)
|
1.3
|
995.9
|
Jul-10
|
8.4
|
1.7
|
1006.0
|
Aug-10
|
7.5
|
15.0
|
1028.5
|
Sep-10
|
22.9
|
4.9
|
1056.3
|
Oct-10
|
19.1
|
6.6
|
1082.0
|
Nov-10
|
(2.8)
|
3.5
|
1082.7
|
Dec-10
|
26.2
|
1.4
|
1110.2
|
2010
|
89.8
|
57.6
|
1110.2
|
Jan-11
|
2.1
|
11.9
|
1124.2
|
Feb-11
|
13.3
|
14.1
|
1151.6
|
Mar-11
|
(0.3)
|
15.8
|
1167.1
|
Apr-11
|
19.3
|
25.7
|
1212.2
|
May-11
|
(9.3)
|
7.0
|
1209.9
|
Note: all figures are in US$ billion Source: Eurekahedge
Although North American hedge funds have regained investor confidence and are attracting considerable asset flows, the funds of hedge funds sector in the region continue to witness outflows. Figure 2 compares the monthly asset flows to North American hedge funds and funds of hedge funds since the start of 2008. A significant number of funds of hedge fund investors have started allocating directly to hedge funds and we attribute this to single-manager funds providing better downturn protection, their continued outperformance over the last three years and to the losses suffered by funds of hedge funds in 2008. For a more in-depth analysis of the funds of the hedge funds industry, please see the Eurekahedge Key Trends Funds of Funds Report which is available on our website.
Figure 2: Comparative AuM growth of North American hedge funds and North American funds of funds
Fees
The fee structures of hedge funds also came under criticism during the financial crisis, prompting many new managers to offer reduced fees in order to attract greater capital from investors (as shown in Table 2). Average performance fees of new launches fell to 17.45% in 2009; however since then the average performance fee of hedge fund launches is back to nearly 19% as excellent performance in 2009 led to increased demand for hedge funds in 2010 and 2011.
Table 2: Changes in fee structures of hedge fund launches between 2004 and 2011
Year
|
Average Performance Fees
of Launches (%)
|
Average Management Fees
of Launches (%)
|
2004
|
19.60
|
1.57
|
2005
|
19.92
|
1.69
|
2006
|
19.47
|
1.66
|
2007
|
20.35
|
1.63
|
2008
|
19.14
|
1.57
|
2009
|
17.45
|
1.67
|
2010
|
18.85
|
1.68
|
May 2011
|
18.97
|
1.74
|
Source: Eurekahedge
Fund sizes
Figure 3 gives the breakdown of the North American hedge fund population in terms of fund sizes over the last few years. Through the financial crisis, the number of small funds – less than US$50 million increased to more than 64% of the total fund population due to losses and redemptions. Although this number has decreased over the last 12 months, the smaller funds still account for 60% of the population as most of the asset flows have gone to the larger funds. This is primarily because of investors’ predilection for established brand names and famous managers. Other reasons include the sentiment that smaller hedge funds are more risky, liquidity concerns, and minimum asset size criteria for institutional investors.
Figure 3: Changes in the composition of the fund population by fund size (US$ million) since 2007
Head office location
Figure 4 shows the manager location breakdown for North American hedge funds. The United States accounts for 80% of the assets as it is the oldest hedge fund centre with the largest market, most number of investors, service providers, financial products and trained professionals.
Figure 4: Head office location by AuM – May 2011
Geographic mandates
In terms of geographic investment mandates, we compare the current breakdown of the industry with the pre-financial crisis landscape. Funds investing with a global mandate and those focused on North America, dominate the industry together – accounting for 94% of the assets. It should be noted that global-mandated hedge funds also invest a significant amount of their capital in North American markets. The share of globally investing funds has increased since 2007 because of two primary reasons – the need for diversification and the fact the globally investing funds did not suffer losses to the same extent in 2008 as funds investing in one region only.
Figures 5a-5b: Geographic mandates by assets under management
Strategic mandates
The strategic mandate breakdown has witnessed some changes over the last four years. The share of long/short equity funds has declined significantly due to losses in 2008 and redemptions, CTAs have increased their share through downturn protection in 2008 and strong asset flows since then, and event driven funds have increased share by 5% primarily due to the excellent performance since 2009. Multi-strategy funds have also increased their share of North American hedge fund assets as a diversified exposure across different asset classes helped the managers to post strong profits since 2009.
Figures 6a-6b: Strategic mandates by assets under management
Administrators
In the wake of the financial crisis, the heightened stress on regulations that hedge funds must adhere to has meant that they must employ recognised third-party administrators in order to attract any capital from investors. As such, the administrator landscape of the North American hedge fund industry; which is very competitive with a plethora of small players, has seen some consolidation within the top 10 firms – in 2008, the top 10 administrators accounted for just about 60% of industry assets while in 2011, the top 10 firms have more than 70% of industry assets under administration.
Tables 3a-3b: Market share of administrators by assets under administration
2008
|
Administrator
|
Market Share
|
CITCO
|
16.1%
|
HSBC
|
8.5%
|
Citigroup
|
8.4%
|
Bank of New York
|
8.2%
|
State Street
|
5.5%
|
Custom House
|
3.4%
|
Fortis
|
3.1%
|
Goldman Sachs
|
2.7%
|
IFA
|
2.2%
|
SEI Investment Services
|
1.9%
|
Others
|
40.1%
|
|
2011
|
Administrator
|
Market Share
|
CITCO
|
17.79%
|
State Street
|
13.23%
|
Custom House
|
9.41%
|
HSBC
|
8.09%
|
Citigroup
|
6.85%
|
SEI Investment Services
|
3.36%
|
Goldman Sachs
|
3.15%
|
GlobeOp
|
3.15%
|
Bank of New York
|
3.10%
|
SS&C
|
2.89%
|
Others
|
28.99%
|
|
Source: Eurekahedge Source: Eurekahedge
Prime brokers
The breakdown of the prime brokers’ share of North American hedge fund assets has also seen some changes through the financial crisis. Tables 4a and 4b show the share of prime brokers in 2008 and 2010 based on data reported to the Eurekahedge databases by hedge funds themselves and not by prime brokers. While the top three prime brokers have remained the same, there is now more equitable distribution across these three, as well as among the other top-ten players. This is primarily because of hedge funds choosing to use more than one prime broker as a measure against counter-party risk. The share of ‘Others’ has also decreased to less than 10% as the industry has grown towards consolidation by larger financial institutions .
Tables 4a-4b: Market share of prime brokers by assets under management
2008
|
Prime Broker
|
Market Share
|
J.P. Morgan
|
24.74%
|
Goldman Sachs
|
17.33%
|
Morgan Stanley
|
14.75%
|
Barclays Capital
|
7.53%
|
UBS
|
5.28%
|
Citigroup
|
4.71%
|
Deutsche Bank
|
3.75%
|
BNP Paribas
|
3.75%
|
Merrill Lynch
|
2.93%
|
HSBC
|
2.47%
|
Others
|
12.77%
|
|
2011
|
Prime Broker
|
Market Share
|
JP Morgan
|
20.11%
|
Goldman Sachs
|
16.80%
|
Morgan Stanley
|
11.97%
|
Credit Suisse
|
11.19%
|
Deutsche Bank
|
11.06%
|
Citigroup
|
5.98%
|
UBS
|
4.84%
|
BNP Paribas Fortis
|
3.01%
|
Barclays Capital
|
3.00%
|
Bank of America Merrill Lynch
|
2.66%
|
Others
|
9.37%
|
|
Source: Eurekahedge Source: Eurekahedge
Performance review
In this section we review the performance of North American hedge funds over the last few years, and also compare this to other investment vehicles across the different strategies and main geographic investment mandates of North American hedge funds.
Figure 7: Performance of North American hedge funds vs other investment vehicles
Table 5: Performance of North American hedge funds vs other investment vehicles
|
North American Hedge Funds
|
North American Funds of Funds
|
North American
Long-only Absolute Return Funds
|
S&P
500
|
Eurekahedge Hedge Fund Index
|
12 month returns
|
15.22%
|
9.21%
|
20.24%
|
23.48%
|
11.74%
|
3 year annualised returns
|
8.70%
|
0.43%
|
5.23%
|
-1.33%
|
5.87%
|
2011 YTD returns
|
3.29%
|
3.02%
|
4.68%
|
6.96%
|
1.53%
|
Source: Eurekahedge
May 2011 YTD the Eurekahedge North American Hedge Fund Index was up 3.29%, which compares favourably to funds of hedge funds and global hedge funds. Although this was lower than the 6.96% return posted by S&P 500 over the same period, the returns were more stable with almost half the volatility. Additionally, in terms of three year annualised returns, North American hedge funds are ahead of the underlying markets as well as other investment vehicles, with annualised gains of 8.70%.
Figure 7 shows the performance of North American hedge funds against North American funds of hedge funds, long-only absolute return funds, global hedge funds and the S&P 500 index since May 2008. Since then, the S&P 500 was down by 3.94%, while North American hedge funds gained 28.44%, an outperformance of more than 30% over three years. In addition to these strong returns, the volatility of the Eurekahedge North American Hedge Fund Index has been much lower than that of the underlying markets – the three year annualised standard deviation of S&P 500 returns is 21.81% while that of North American hedge funds is 7.67%. Hedge funds have also outperformed global hedge funds, North American long-only absolute return funds and North American funds of hedge funds since May 2008, as seen in table 5.
Geographic mandates
In terms of geographic investment mandates, North American hedge funds are divided into two categories: a) funds investing in North America, and b) funds investing globally. Figure 8 shows the May 2011 YTD returns, 12 month returns and 3 year annualised returns across these two types of North American hedge funds.
Both mandates have witnessed positive returns over the last three years, with North America investing funds offering stronger performances throughout this time. Funds investing in North America recorded three-year total returns of 28.70% while global-investing North American funds were up 18.34% over the same period, pointing to a trend of outperformance by North American investing funds over those employing a global mandate (as shown in Table 6). One of the reasons for this trend is that large sectors of the global-investing North American hedge fund industry is made up of macro and CTA managers whose recent performances have lagged behind their peers.
Figure 8: Performance of geographic mandates
Table 6: Performance of geographic mandates
|
EH Global Investing North American Hedge Fund Index
|
EH North American Investing Hedge Fund Index
|
12 month returns
|
11.81%
|
15.29%
|
3 year annualised returns
|
5.77%
|
8.78%
|
2011 YTD returns
|
0.43%
|
3.34%
|
Source: Eurekahedge
Strategic mandates
Figure 10 shows the performances across the different strategic mandates of North American hedge funds. Remarkably all strategies have witnessed positive returns over the last three years, with most strategies delivering three year annualised returns of more than 10%.
Funds with exposure to fixed income assets have delivered the best returns over the last three years, with distressed debt managers coming out ahead of the rest with three year annualised returns of 14.04%. Distressed debt managers were down significantly in 2008, due to poor credit market conditions and large client redemption requests. However since then they have delivered with exceptional gains – since May 2009 the Eurekahedge North American Distressed Debt Hedge Fund Index is up by a massive 76.41%.
North American CTA/managed futures funds have also performed exceptionally well over the last three years, with annualised gains of 11.61%. In sharp contrast to the other strategies, CTA managers witnessed gains of 26.53% in 2008 at a time when the average North American hedge fund was down 9.31%.
Figure 10: Performance across strategic mandates
Table 7: Performance across strategic mandates
|
Arbitrage
|
CTA/
managed futures
|
Distressed debt
|
Event driven
|
Fixed income
|
Long/
short equities
|
Macro
|
Multi-strategy
|
Relative value
|
12 month returns
|
11.00%
|
15.48%
|
26.40%
|
15.35%
|
13.31%
|
16.11%
|
-11.10%
|
12.07%
|
15.46%
|
3 year annualised returns
|
9.35%
|
11.61%
|
14.04%
|
10.10%
|
10.21%
|
6.53%
|
0.98%
|
8.06%
|
12.33%
|
2011 YTD returns
|
3.43%
|
0.10%
|
5.49%
|
2.43%
|
4.88%
|
4.35%
|
-11.84%
|
2.89%
|
3.91%
|
Source: Eurekahedge
