04/17/2013

Big Get Bigger in Annual Manager Ranking

Recent investment gains and greater use of leverage have added even more heft to the hedge fund industry’s biggest managers.

The number of firms with at least $10 billion of gross fund assets reached 90 at yearend, up from 74 a year earlier, according to the latest update of Hedge Fund Alert’s Manager Database (see rankings on Pages 6-12). And the number with $25 billion or more jumped to 32, from 20 at yearend 2011.

Together, the gross fund assets for the 200 largest managers climbed to $3.3 trillion, from $2.7 trillion — an increase of 22%. Industrywide, gross fund assets increased 19% to $4.3 trillion.

This year’s ranking is led by Israel Englander’s Millennium Management, with $198.2 billion of gross assets — a measure that includes leverage. Bridgewater Associates, with $139.3 billion of gross assets in hedge funds, placed second, followed by Citadel ($107.6 billion), BTG Pactual Asset Management ($78.9 billion) and SAC Capital ($75.4 billion). Last year, the league table was topped by Citadel, followed by Millennium, Bridgewater, Pimco and SAC.

The Manager Database tracks all SEC-registered hedge fund operators — generally, firms with at least $150 million of regulatory assets. The data is culled from Form ADV filings from 2,173 firms, as well as reporting by the newsletter’s staff. Under the Dodd-Frank Act, registered managers are required to update their filings annually.

The top-200 list is based on assets managed only in hedge funds, not in separate accounts or other vehicles. As a result, the ranking understates the size of firms that have substantial separate-account businesses. Bridgewater, for example, manages $183.7 billion of regulatory assets overall. And because the SEC asks managers to report gross assets, some operations are greatly magnified by the use of leverage. Millennium, for instance, manages just $16.9 billion of equity capital. By comparison, Bridgewater reports $142 billion of client assets in its ADV “brochure” — making it by far the world’s largest hedge fund manager on a net basis.

Among the top 200, nearly three-quarters reported increases in gross fund assets — many quite substantial. Millennium, for example, saw its gross assets increase by 66.6%, from $119 billion. And since the New York firm runs all of its capital via a single entity called Millennium Partners, that vehicle weighs in as the biggest single-manager hedge fund measured by gross assets.

The increases reflect a combination of factors, including 2012 investment gains that averaged 6.4% across the industry, according to the HFRI Fund Weighted Composite Index. While net inflows totaled a modest $34 billion last year, according to Hedge Fund Research, a disproportionate amount went to firms with more than $5 billion of net assets.

“Although it is true that investors are starting to invest again, generally speaking that money is being consolidated among the top firms,” said Rosemary Fanelli, chief executive of compliance consultant CounselWorks.

In many cases, sharp increases in gross assets also reflect increased leverage. A source at a major prime broker said average gross exposure for the bank’s hedge fund clients has risen to 223%, from 212% in early 2012 and 204% in 2011.

On a net basis, for example, Millennium experienced only a marginal increase in assets under management, and yet its gross assets shot up by nearly $80 billion. A source attributed the increase in part to a larger number of short positions, which boosted gross exposure. But he noted the increase doesn’t necessarily mean a higher level of risk, since Millennium maintains a diversified long/short portfolio that has low net exposure to the market. In fact, he added, a larger short book could actually result in lower risk by offsetting the long positions.

Among the firms that posted the sharpest increases in gross assets were a number of managers that trade mortgage-backed securities. Pine River Capital rose to the No. 6 position in this year’s ranking, from No. 11, after its gross fund assets more than doubled to $74.5 billion. Pine River benefited from a rally in the mortgage-bond market that allowed many MBS players to post gains of 25-50% last year. Other examples include MKP Capital, whose gross assets leapt to $24 billion from $11.7 billion, and Structured Portfolio Management, which went from $4.4 billion last year to $11.8 billion.

Meanwhile, the asset growth has translated into an increase in the number of investment professionals employed by hedge fund companies. Investment staffs at SEC-registered firms grew 5% in aggregate, to a total of 42,579 positions. The figure could be inflated by some firms, such as BlackRock and Pimco, whose investment staffs manage large amounts of assets outside of hedge funds.

Only one manager among the top 10 reported a double-digit decline in gross fund assets: BTG Pactual Asset Management, which dropped 16% to $78.9 billion. The New York firm, a unit of Brazilian bank BTG Pactual, pursues a global-macro strategy that produced impressive gains last year, including a 28.1% return for its flagship BTG Pactual Global Emerging Markets and Macro Fund. Despite the gain, the vehicle’s gross assets slipped 21.3% to $40.8 billion — still enough to rank third on the list of biggest single-manager funds. The decline presumably reflects a decreased use of leverage, since net assets increased substantially last year. As of February, the fund had $5 billion under management.

The ranking highlights several quirks of the industry. Among the largest single-manager funds, for example, is a vehicle that AQR Capital identifies as “805-5311398873.” Both AQR and Bridgewater run highly complex businesses that employ multiple commingled vehicles to manage assets for select groups of investors or to implement broad investment programs such as Bridgewater’s Pure Alpha and All Weather products.

Some recognizable names from last year’s ranking — including blue-chip manager Highbridge Capital — are conspicuously absent from this year’s list. The reason: Bank-owned fund operations that last year were treated as distinct entities are now combined under one umbrella. Thus Highbridge and its $16.7 billion of gross hedge fund assets have been subsumed by J.P. Morgan, with a total of $26.5 billion of gross fund assets. Similarly, Black River Asset Management and CarVal Investors have been folded into their parent, Cargill, which cracks the top 10 with $63.6 billion of gross fund assets.

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