GLOBAL - An extensive quantitative study of the world's hedge funds by analytics and reporting software and services provider PerTrac paints a picture of an industry recovering healthily after the financial crisis, but also consolidating significantly.
The study, 'Sizing the 2010 Hedge Fund Universe', also appears to confirm the shift away from funds of funds and toward direct allocation.
Preliminary data for 2010 suggests that 1,184 new hedge funds were launched, up more than 50% from the total of 783 launched in 2009.
There are now 9,572 hedge funds managing around $1.6trn (€1.1trn) - still below the $2trn peak reached at the end of 2007, but up 11% from the total at the end of 2009 (these figures exclude 'CTAs', or managed futures programmes, which PerTrac classifies separately).
Despite the number of new launches, there is ample evidence of consolidation among larger, more venerable players. Just 280 $1bn-plus funds - 3% of the total - account for 54% of that $1.6bn in assets.
While there are 3,763 funds managing $25m or less, that is far fewer than the 6,000 or so that were managing $25m or less in 2008 - and there is plenty of evidence both of constant churning among the smallest funds and of a general clear-out of the weakest names.
Lisa Corvese, managing director for global business strategy at PerTrac, said: "I've seen great evidence that this group of small managers changes a lot from year to year, both at PerTrac and also in my previous roles in the fund administration business.
"A hedge fund has the same operational, infrastructure and cost structure of any small business - and the statistics tell us only roughly 15% of small businesses survive. Managers need to think very carefully about how big an asset base they need to launch. The industry as a whole is consolidating."
The number of CTAs actually declined from 2009 to 2010, falling by 428 to 1,997 - but PerTrac suggests this is a reflection of how hot the sector became after its stellar performance through the crisis in 2008.
"2009 was just a blip in managed futures," said Corvese. "The trend between 2008 and 2010 represents something more sustainable."
New funds of funds are still being launched, but at a much slower rate than single-manager funds: 352 were rolled out in 2010, little changed from the 352 launched in 2009.
And while there are now more single-manager hedge funds than at the previous peak in 2008, today's total of 3,196 only brings the number of funds of funds back to its previous peak.
In terms of assets under management, the single-manager funds' 11% increase over 2009 was balanced by a 10.5% decrease for funds of funds, which now account for $518bn of hedge fund investment.
Back in 2008, funds of funds managed $750bn. Furthermore, the assets in funds of funds include allocations to CTAs, which are excluded from the single-manager fund totals.
"Reports of the death of funds of funds are greatly exaggerated, to paraphrase Mark Twain," Corvese said. "There will always be a place for them. Smaller institutions making their first allocations to hedge funds really have very little choice but to take this route."
One of the difficulties of building a hedge fund portfolio in-house is the lack of standardised reporting procedures. That picture is improving: PerTrac found that 95% of single-manager funds reported data in 2010, up from 83% in 2009 and 87% in 2008 - although some of this improvement was no doubt down to the fact that performance had recovered.
Nonetheless, almost half of the funds in the PerTrac study reported to only one of the 10 databases from that it took data.
"Since more than 70% of funds reported to three or fewer third‐party providers in 2010, any one database provides only a sample of the overall hedge fund universe, requiring investors to access multiple data sources to obtain a broad view of the available investment opportunities," said the report.
'Sizing the 2010 Hedge Fund Universe' used PerTrac's Analytics software to aggregate data from 10 leading global hedge fund databases: Altvest (now part of Morningstar Hedge Fund Database); Barclay Hedge Fund Database; Barclay CTA Database; CogentHedge; Eurekahedge Global Hedge Fund Database; Eurekahedge Global Fund of Funds Database; HedgeFund.net; Hedge Fund Research; Lipper TASS; and Morningstar Hedge Fund Database.