As the hedge fund industry matures, growth will slow and become more concentrated, according to a report from Barclays Prime Services, “Making It Big.” Future growth would be primarily due to increases in market share rather than net flows.
The report was compiled from interviews with 25 managers at the founder, CEO or COO level, and 10 large hedge fund investors, an analysis of 41 very large hedge fund managers globally and more than 10,000 data points from industry hedge fund databases.
The report finds that most recent growth has been driven by performance; three-quarters of the growth in the last two years in the hedge fund industry assets under management (AuM) has been driven by performance, compared to the 2001 to 2007 period, when growth was more evenly split between inflows (48%) and performance (58%).
AuM is also becoming increasingly concentrated. Managers with more than $5 billion of AuM now control two-thirds of all industry assets, up from 56% in 2008.
For the largest hedge fund managers, growth has been tough over the past five years; more than half the managers have disappeared from the top 20 list over a five-year period. After 2008, many large hedge fund managers revised their business models, transitioning into either multi-strategy managers (pre-2008), asset-class specialists, or diversified alternative asset managers. These models can withstand investor sentiment shifts and market dislocations but do not grow AuM as quickly.
“Hedge fund managers looking to grow their assets under management today can no longer take inflows for granted—this challenging capital raising environment requires them to have a clear growth strategy involving the choice of a business model that supports their growth ambitions,” said Harry Harrison, head of Prime Services, Rates, Securitized Products and Municipals Trading. “Scaling up existing products, launching related or unrelated new products, and acquiring other hedge funds are all legitimate growth options, but each of these comes with its own set of challenges.”
“’Making It Big’ shows that managers can no longer grow successfully without a clearly thought-through and well-executed strategy,” added Louis Molinari, head of Capital Solutions. “Developing into a large and diversified manager has the potential for huge value creation, but it won’t happen without heavy investment into and synergy across a number of areas, specifically the investment engine, the product portfolio, distribution capabilities, infrastructure and culture.”
Hedge Fund Growth Slows As Industry Matures, Says Barclays
As the hedge fund industry matures, growth will slow and become more concentrated, according to a report from Barclays Prime Services, “Making It Big.” Future growth would be primarily due to increases in market share rather than net flows.