The value of the assets managed by the hedge fund industry grew 21% from $1.009 trillion to $1.223 trillion in 2006. Or so concludes twelfth annual survey of hedge funds by the Hennessee Hedge Fund Advisory Group, the industry’s oldest hedge fund manager survey.
“Despite some high profile disappointments, the hedge fund industry continued to see positive inflows, confirming its maturity as an asset class,” says E. Lee Hennessee, Managing Principal of Hennessee Group LLC.
Asset growth was the result of positive manager performance (+11%) and new capital inflows (+10%). In addition, the number of hedge funds grew 10% from 8,050 to 8,900 funds.
Since 1987, the Hennessee Hedge Fund Index has generated an annualized return of +13.70% (net of fees and expenses) with approximately 37% less volatility than the S&P 500 Index, which returned +9.01% over the same time period.
“The growth in the hedge fund industry has largely become a ‘zero sum game’ on the long side since the capital is largely being re-allocated from long only equity and bond managers to hedge funds,” says Charles Gradante, Managing Principal of Hennessee Group LLC. “The real growth concern going forward is the potential difficulty maintaining historical short hedge ratios due to a supply shortage of stocks and bonds to borrow. This will likely cause a situation which will change the industry’s landscape, creating the need for a greater use of derivatives in lieu of the cash market to hedge portfolios.”
Introduced in 1995, the the 2006 Hennessee survey respondents included 440 hedge funds from 97 management companies representing over $256 billion in assets. The Survey excluded CTAs who solely trade futures contracts.
Other key findings from the survey include:
Individuals and family offices (including funds’ general partners and employees) continue to represent the largest source of capital for hedge funds, comprising 40% of total industry assets. Fund-of- funds represent 28% of industry assets, while corporations represent 18%, pensions represent 11%, and endowments and foundations represent 8%.
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Hedge funds surveyed had an average long exposure of 106% and short exposure of -55%, indicating a low use of margin.
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Hedge funds surveyed had an average gross exposure (longs plus shorts) of 161%, while net exposure (longs minus shorts) was +51%. Average gross exposure is at the highest level since the introduction of the survey in 1995, indicating more leverage is being used to generate returns.
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86% of hedge funds are registered with a regulatory agency (NASD, SEC, CFTC, State), up from 61% the previous year.