An update to a story we carried last week on hedge fund databases….
Hedge fund analytics company PerTrac released the results of their 2006 survey of hedge fund databases today. Apparently the world’s hedge fund database providers have surveyed a lot of hedge funds over the past year. PerTrac recorded a massive 61% jump in the number of funds tracked vs. the same study a year ago (20,000 vs. 12,000, counting each fund class separately). Meredith Jones, Managing Director and Head of Global Marketing at PerTrac tells AllAboutAlpha that this can be attributed to both industry growth and more comprehensive data collection.
Counting duplicate records, the twelve (12) databases analyzed by PerTrac captured 56,000 fund records, an increase of 15,000 over last year. Removing duplicates, PerTrac estimates there are approximately 15,000 single-manager funds and funds-of-funds in the world today, managed by around 5,000 firms.
The study confirms earlier research presented by Professors Bill Fung and David Hsieh showing that few hedge funds report to more than one or two databases. According to PerTrac:
“…relatively few hedge funds and fund of hedge funds report to more than two or three databases, and almost none report to all twelve databases. In fact, a significant number of hedge funds and FOFs, more than 5,000 in the twelve-database sample, appeared only in a single database…No single hedge fund database covers even half of the identified distinct investments.”
The study pegs the entire hedge fund industry at $1.4 trillion. But it also confirms a hunch we’ve had for some time – that the industry continues to become more concentrated.
According to the study, there were approximately 250 funds with over $1 billion of assets in 2006. If we assume an average fund size of a modest $2.5b for this category, that would explain around $625 billion of the industry. About 400 funds had between $500 million and $1 billion of assets. Using $750 million an average, that’s around $300 billion for this group. So about two-thirds of the hedge fund assets in the world ($925b) are managed by the top 650 (5%) of funds.
Meanwhile, the other 95% of hedge funds are left to compete for the remaining $485b (for an average of about $30 million each). At a fee of 2 and 20, that’s about $1m in revenue for each fund – enough to pay the landlord, a few staff, and Bloomberg or Reuters. And that’s the average fund. (Thankfully, these small fry are probably more likely to have more than one fund on their books. But PerTrac’s Meredith Jones says they also tend to have less pricing power.)
Coincidentally, Institutional Investor reports today on a study by the Milken Institute showing that the top 3% of hedge fund managers control 35% of hedge fund industry assets (using HedgeFund.net data). This is roughly in line with the data in the PerTrac report.
This level of concentration isn’t out of line with the mutual fund industry, says Jones. And with institutional investors seeking larger, more stable hedge funds, growth of the larger players is becoming a “virtuous cycle”.
So despite the media’s claim that there are “8,000”, “10,000”, or “15,000” hedge funds in the world, it seems only about 1,000 hedge fund managers would probably ever make it to the radar screens of most investors.