The average size of hedge funds has increased dramatically over the past two years, despite many suffering from recent volatility and exposure to credit markets, according to a new report from the Tabb Group.
Nearly half of the hedge funds surveyed in the report, Hedge Funds 2008: Perspectives on Prime Brokerage, Volatility and Expansion, admitted having been negatively impacted by direct exposure to securitized debt, ineffective models or poor asset allocation.
Conversely, however, a further quarter of the respondents managed to benefit from the downturn by shorting or good hedges. Of course, these are all funds which survived, so it is possible that there are more ‘failures’ that were excluded from the test sample.
The recent shift to high volatility and an increased frequency of margin calls, many of the highly levered hedge funds that were successful in the bull markets between 2002 and 2006 have had to take money off the table, the report says, with hedge fund companies, on average, de-leveraging by 19 per cent.
Few funds think that leverage will creep back up to pre-credit crunch levels, but around half believe that the industry will plateau and remain at current levels over the next two years.
A potentially beneficial side effect of this re-examination of appropriate leverage, particularly among quantitative funds that suffered in the summer of 2007, is that, according to the report, they are more actively rebalancing their portfolios than ever before.
A repeated criticism of many quants has been that the assumptions on which their portfolios are constructed are too heavily based on historical data, and often do not reflect the reality of very volatile markets.
This, coupled with what appeared to be a clustering by major funds around similar portfolios, was blamed for a slide by several large quant funds in August 2007, as previously assumed correlations broke down.
The message, however, is far from fatalistic. The mean assets under management of a hedge fund has increased from $1.85bn in 2006 to $4.4bn in 2008, and the median AUM has soared from $513m to $1.4bn over the same period.
While investors may be taking a greater interest in their funds’ strategies, they have not been heading to the lifeboats en masse. The respondents to the Tabb Group’s survey experienced average inflows of $400m in 2007.
