At the start of 2012, hedge fund managers welcomed the year with the prospect of a better economic outlook compared to the difficulties they encountered in 2011. However, as the endless Eurozone debt crisis continued to drag on through the first half of 2012 coupled with ongoing worries over growth forecasts for the US, China and emerging markets, high hopes have been tempered by a more sober economic reality.
Yet, the industry has managed to steadily steer its way through the tough risk on/risk off investment environment. Global assets have modestly risen to surpass $2.245 trillion (including UCITS funds) – a slight increase over the $2.158 trillion total (including UCITS) at the end of 2011. But, as their performance lags behind the major stock market indices, managers still face the challenge of proving that they can deliver better risk-adjusted returns with less volatility – regardless of the market conditions. Clearly, the halcyon days of rapid growth, easy money and an eagerness for risk-taking by investors no longer characterise the current industry.
Harder times inevitably create more stressful operating conditions. As our Industry Outlook Survey reveals , chief operating officers are very much on the front line in meeting increasing demands for greater transparency and risk management analysis – particularly from institutional clients. At the same time, they need to confront a multitude of new regulatory requirements which are significantly adding to the costs and administration hassle in running a hedge fund business. Unsurprisingly, all of the survey’s panellists agree that COOs are finding it harder to fulfil their role than in the past.
Data generated by our elite Global Billion Dollar Club indicate that size still matters – a trend that has characterised the slow recovery from the global financial crisis. Billion-dollar firms continue to grow bigger and now account for $1.848 trillion, or 86%, of the industry’s overall assets. Investors are increasingly attracted to the larger players as reflected in the fact that the 50 biggest billion-dollar firms in the US increased assets by 3.34% in the first half of the year while assets for the rest of the US industry only grew by 1.52%.
New fund launches remain at a depressed level, particularly in the US and Europe, but, with the volume of assets edging up, there has significantly not been any net redemptions – not yet at least. It is also heartening that many new funds are being launched by managers with an impressive investment background and a sound, institutional-quality business structure.
THE CHALLENGE FOR FUNDS OF FUNDS
Perhaps the greatest challenges now confront the fund of hedge funds (FoHFs) industry where the biggest players have seen a drastic fall in assets from $1.1 trillion in 2007 to $600 billion today. Like much of the hedge fund industry, FoHFs are also undergoing a period of significant consolidation – driven by the relentless institutionalisation of the business. Fortunately, the haemorrhaging of clients and assets has stopped as FoHF managers focus on reinventing their business model . Other FoHF players are aiming to specialise, often by creating bespoke portfolios as well as offering advisory services amid a further blurring of the traditional lines between FoHFs and consultants.
This edition of the Global Review is also presenting the first ever global survey of the prime broking market , based on regional surveys conducted by our data teams in all the main hedge fund locations. This detailed analysis provides a unique insight into a key area underpinning hedge fund operations and confirms that Goldman Sachs remains the world’s leading prime broker in terms of mandates and client assets – though hotly pursued by a range of other leading providers.