Remember the days when $1.25 trillion was a lot of money?

2 December 2007

“Dr. Evil: Here’s the plan. We get the warhead and we hold the world ransom for…ONE MILLION DOLLARS!
Number Two: Don’t you think we should ask for more than a million dollars?  A million dollars isn’t exactly a lot of money these days.
Dr. Evil: Okay then, we hold the world ransom for…One… Hundred…BILLION DOLLARS!

In the string of classic movies about a randy, orthodontically-challenged British spy from the 1960’s named Austin Powers, comedian Mike Myers plays the prototypical bad-guy “Doctor Evil.”  Frozen in time since the summer of love, Doctor Evil concocts a plan to hold the world of 1997 ransom for the then astronomical sum of one million dollars.  When his second in command “Number Two” played by Robert Wagner tells him that one million dollars is wildly out of date, he quickly adjusts the figure upward hoping no one would really notice.

In a way, that’s what is happening now in the game of guess-the-size-of-the-hedge-fund-industry.  As the Wall Street Journal pointed out last week, some pundits have recently pegged the number at $1.25 trillion (with pinky firmly planted at edge of mouth a la Myers).  But without missing a beat, other experts have recently put it at $1.48 trillion and even at $2.48 trillion (see graphic from WSJ below). 

Today, yet another hedge fund database provider came out with an even higher number ($2.68 trillion), making the original $1.25 trillion look hopelessly out of date (or downright wrong).  One of the problems, according to the Wall Street Journal, is that some hedge funds - particularly those in the high-leverage world of credit derivatives - report their deployed assets, not just their equity.  As a result, their asset figures appear to rise and fall with the amount of leverage they use.  Says the WSJ:

“…most hedge-fund managers report their numbers according to the market custom, according to fund brokers and investors. Those that don’t tend to be either in the credit market, where large amounts of borrowing are often used to invest in complex securities, or are smaller funds looking to inflate their size.”  

So it may come as no surprise that the most recent snapshot includes the following observation by Thomson Investment Management News:

“Structured credit hedge fund assets fell 9.9 pct during the third quarter to an estimated 62.7 bln usd. Total assets in these funds peaked in the second quarter at an estimated 69.6 bln usd after almost doubling in the year prior.”

The Wall Street Journal also cites another factor skewing returns.  Some funds of funds that manage internal single-strategy funds are double-counting, once at the single fund level and then again at the fund of funds level. The justification seems to be that the fund of funds adds value, and charges a separate fee.  Thankfully, database providers don’t subscribe to this logic.  Imagine if the value of the world economy was the aggregate value, not of its total output, but of the price of goods at every point along the value chain.      

While there is apparently some debate about several aspects of these figures, there is no debate about one thing: eye-popping numbers make great headlines.  With some hedge fund managers making over a billion dollars a year and the world’s largest money management firms managing well over a trillion dollars, the overall size of the industry better be growing.  

Because after all, $1.25 trillion isn’t actually a lot of money these days…          

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2 Responses to “Remember the days when $1.25 trillion was a lot of money?”

1. Good to Go Pile . . . « Trading for the Masses Says:
   December 3rd, 2007 at 12:50 pm

   […] Remember the days when $1.25 trillion was a lot of money? […]

2. Monday links: earnings recession « Abnormal Returns Says:
   December 3rd, 2007 at 1:00 pm

   […] Just how big is the global hedge fund market? (All About Alpha) […]