The hedge fund industry is big. Make that really big. Or sorta big?
Question: How big is the hedge fund industry, by assets under management?
1. $1.87 trillion
2. $2.65 trillion
3. $2.9 trillion
If you chose 4., you would be right, because no one really knows how much money is in hedge funds. That’s because hedge funds are private and clustered around the globe and mostly aren’t required to report much of anything, except funds with various kinds of public listings in the US, the UK and elsewhere. And even then, the information is sketchy. The above – rather wide – estimates are from various industry data compilers (see below).
Determining the exact size of the industry is like counting smokers: people start smoking and stop daily, sometimes by dying. Similarly, new funds are always forming and liquidating, and investors regularly allocate and redeem interests without public disclosure. And assets rise and fall daily in individual hedge funds on performance gains or losses.
Furthermore, there is a definitional aspect here: some funds that call themselves hedge funds really aren’t, because they don’t sell short, use leverage or buy derivatives, but are basically long-only funds with lucrative hedge fund fee structures aimed at wealthy investors.
But the question is hardly academic. It is of interest to tax authorities, policy makers, consultants, journalists and others, and now at least one government agency is making a big stab at it.
The Cayman Islands Monetary Authority (CIMA) in a few years ago began requiring electronic reporting of various data points for hedge funds which are domiciled there, virtually all of which are offshore branches of hedge funds based in North America, London, Asia and elsewhere.
Hedge funds establish offshore branches mainly to attract international money, which gives non-domestic (and even domestic) investors tax advantages. Cayman Islands has the lead in this, with over 9,000 funds listed, although the British Virgin Islands, Bermuda and other jurisdictions are pushing to get hedge funds to list in their countries.
Just last week, CIMA disclosed the first aggregated data reported by the limited pool of 5,052 hedge funds and came to a few interesting conclusions:
1. Gross assets under management (AUM) from these 5,052 funds was $2.3 trillion as of Jan., 2007.
2. New York has the biggest portion of AUM: $388 billion or 28 percent, with the UK second at $250 billion or 18 percent.
3. The funds were leveraged, on average, at 0.67 percent.
4. Return on gross assets was 6 percent.
5. Return on net assets was 10 percent.
Now, besides AUM, there is also a range of opinions on how many hedge funds there are, with most industry estimates weighing in at around the 8,000 to 12,000 range. So, given that 5,000 of them reported AUM of $2.3 trillion to CIMA, it stands to reason that the total AUM figure for the industry is likely higher, making at least two of the above estimates probably wrong. And the CIMA conclusions related to only a portion of the 9,413 funds listed there, with more aggregate data expected over the next year.
But then, the CIMA figures are more than a year old. And who knows how many hedge funds have liquidated with the market turmoil of 2007-8? Similarly, who knows how many have formed since then, since a lot of hedge funds are growing new distressed investing strategies to take advantage of that?
Conclusion: next time you read that the hedge fund industry is $X or $Y trilllion, make sure you read that as “estimated.” Such numbers may make headlines, including on Thomson Reuters, but they have caveats.
Figures above are from:
1. $1.87 trillion: Hedge Fund Research
2. $2.65 trillion: Hedge Fund Intelligence
3. $2.9 trillion: Hedge Fund Manager Week