The evolution and implications of Hedge Fund institutionalization

Résumé du document

Hedge funds and their managers, once obscure enigmas of the investment community, have become in the last decade household names due to their overwhelming publicity as money-hungry madmen. Part of the reason why these loosely regulated funds have drawn so much attention is because their explosive growth in assets under management has rendered them a financial force to be fully cognizant of. Indeed, hedge funds are estimated to hold some $1.7 trillion in AUM today, and one of the biggest contributors to this growth has been the entry of major institutional investors. Since 1999, when high-net worth individuals represented some 80% of hedge funds investors, institutions such as pension funds and university endowments have made their presence felt and are now estimated to represent 50-60% of all hedge fund assets (Economist). The implications of this shift in investor base are significant and will ultimately shape the direction in which the industry goes in coming years.

Extraits

[...] Alexander Ineichen shows that in 1980, total hedge fund assets under management were $193 million, with 100% of that coming from global funds. Essentially no other strategies even existed. The story was largely the same five years later, but by 1990 global funds, macro funds, and funds of funds dominated the breakdown. Likewise, market-neutral, event-driven, and short-only funds each claimed a few hundred million dollars worth of assets, and so began the trend towards heterogeneity. As of January Brown and Goetzmann (2003) found that relative value funds held $ 21.5 billion, global equity funds held $ 18.4 billion, event driven held $ 17.5 billion, and global macro funds held $ 10.6 billion. [...]

[...] The combined financial crises of 1992 and 1997 led to the vilification of hedge funds by the popular media. Once portrayed as investors, hedge fund managers were now seen as mere speculators, out looking to get rich off of the economic hardships of developing nations. Indeed, on September Dr. Mahathir Bin Mohamad, the Prime Minister of Malaysia, said the following in the Wall Street Journal: “Whole regions can be bankrupted by just a few people whose only objective is to enrich themselves and their rich clients . [...]

[...] This means that even if some strategies underperform, others should more than compensate for their losses, and capable multistrat managers should have no problem attracting more institutional money. The conclusion then is that hedge funds are set to grow even more, and institutional investors will be steering the course. Bibliography Berens, James, Judith Posnikoff and Alexandra Coffey. “Institutional investors: incorporating hedge funds into asset allocation process,” Evaluating and Implementing Hedge Fund Strategies. Ronald A. Lake. London: Euromoney Books pp. 304-311. Brown, Stephen J. and Goetzmann, William N. [...]

[...] Inside the House of Money. Hoboken, NJ: John Wiley & Sons, Inc “Hedge Funds: Growing Pains.” The Economist. March GOA, Long Term Capital Management: Regulators Need to Focus Greater Attention on Systemic Risk, Untied States General Accounting Office, October 1999 Ineichen, Alexander M. Absolute Returns: The Risk Opportunities of Hedge Fund Investing. Hoboken, NJ: John Wiley & Sons, Inc Leaf, Stuart, Paul Issac and Michael Waldron. “Understanding continuing trends in hedge funds,” Evaluating and Implementing Hedge Fund Strategies. Ronald A. [...]

[...] According to Klarman, institutions are focusing less and less on sound, bottom-up investment decisions and more on trite questions such as: What has been working lately? How can I be more like industry leaders (i.e. Swensen)? He continues: “Because they were early, Yale has secured large accounts with the top managers in each area, many of whom are now closed for new assets.”His words suggest that new money simply isn't going to be able to capture the excess returns that hedge funds have been promising to now-courageous institutions. [...]