Big hedge funds tighten grip amid consolidation

The hedge fund industry consolidated last year with the number of funds falling by around a tenth from 2012 but assets under management rising $248.8 billion to $2.6 trillion, finds a new report from research firm eVestment.

Firms with more than $1 billion in hedge fund AUM accounted for 83.3% of that increase in assets.

The number of hedge funds that reported to commercial databases dropped to 9,247 from 10,149 in that period.

The number of commodity trading adviser/managed futures (CTA/MF) strategies declined the most, by 19.34%, probably because of underperformance during 2013. The number of funds of hedge funds (FoHFs) numbers fell 10.53% and single-manager hedge funds 6.10%.

And yet single-manager hedge funds grew their assets by $262.5 billion last year, while CTA/MF funds and FoHFs saw their AUM drop $13.8 billion and $12.6 billion, respectively.

Consolidation and rising allocations by institutional investors drove the increase in the number of larger funds.

Single-fund manager funds with AUM of $1 billion or more increased by 12.63% in 2013, and the number of funds managing between $750 million and $999 million grew by 43.75%.

But the number of funds with AUM of $1 million to $499 million fell, with the smallest funds seeing the biggest drop.

This reinforces the view that institutional clients' preference for bigger players and rising costs are making life particularly difficult for smaller funds.

The only bracket of CTA/MF funds to see an increase in number in 2013 was the $250 million to $499 million category. And FoHF numbers fell across the board except those over $1 billion, which saw growth of 8.18%.

In a separate report, Eurekahedge found that that trend has continued into this year with CTA/MF funds down by 93 funds and AUM declining $11.5 billion in the first half.

In other notable findings, eVestment found that while the US hedge fund industry is the biggest globally, China-based firms accounted for 7%, or 636, of the world's hedge funds in 2013, though this is down from 675 in 2012. The country trails only the UK and US in terms of the number of funds it is home to.

Turning to performance this year, the Eureka Hedge Fund Index fell 0.10% in July, but still outperformed the MSCI World Index, which declined 0.83%.

Eurekahedge preliminary data for July showed managers globally experienced performance-based losses of $5.5 billion and net outflow of $4.9 billion.

Asian managers performed best by region, gaining 2.87% in July, driven by improving economic data coming out of China. Japan managers gained 0.72%.

Asia ex-Japan funds also led for the year-to-July with a return of 6.50%, followed by North America strategies, which returned 3.7%.

In July, North American funds recorded performance-based losses of $4.9 billion and net asset outflows of $2.5 billion, while European strategies posted performance-based losses of $1.7 billion and net outflow of $1.6 billion.

Investors and fund managers had been expecting lower industry average returns in 2014, as low as half of 2013 returns, due to regulatory and fund-raising challenges as reported.