Or so says the annual survey of hedge funds by the Hennessee Hedge Fund Advisory Group, the hedge fund consultants.
In the face of difficult equity markets, survey results indicate that the hedge fund industry grew 5% in 2002 to a total of $592 billion through manager performance and new capital inflows. Hedge funds outperformed the broader equity markets in 2002 as the Hennessee Hedge Fund Index declined -3.43% net of fees, bringing the annualized return since January 1987 to 15.28%, versus the S&P return of 11.07% over the same time period. “The year 2002 was the most difficult market for stock pickers and traders alike since 1974; certainly the most difficult year for hedge funds on record,” says Charles Gradante, managing principal of Hennessee Group LLC. “2002 presented paradigm shifts in money management that handcuffed most hedge fund managers. Nonetheless, hedge funds did preserve capital in 2002 and are well positioned, with high amounts of cash, for the economic turnaround expected in the fourth quarter of 2003 and an election year in 2004.” Introduced in 1994, the Annual Hennessee Hedge Fund Manager Survey the 2003 survey respondents include 793 hedge fund management companies and over $137 billion in assets, equating to 23% of total assets in the hedge fund industry. The median hedge fund size in this year’s survey was approximately $124 million.
Other findings in the survey include: Hedge funds were able to avoid serious losses by holding high levels of cash, positioning their portfolios defensively, and maintaining low market exposure. In 2002, the average hedge fund net market exposure was +33%, the lowest in Survey history. After spiking up in 1994 and 1998, the use of margin in 2002 declined to its lowest level since the survey began in 1994. In fact, hedge funds used a minimal amount of margin in 2002, as the average long exposure decreased 6% to 77%. 2 Individuals/family offices remained the largest source of capital for hedge funds, contributing 42% ($249 billion) of total assets. However, their market share has continued to decline from 80% ($79 billion) of total assets in 1994. Fund-of-funds were the second largest source of capital (27% of assets). Individuals/family offices continue to be the fastest growing source of capital (29%). However, fund-of- funds accelerated rapidly and finished second at 28%. The average hedge fund manager aims to manage $693 million in 2003, down from $893 million in 2002. Due to the increased number of institutions offering hedge fund products, 50% of hedge fund managers were Registered Investment Advisers in 2002, up from 42% in 1998. However, 25% are still not registered with any governmental or self-regulating body (SEC, CFTC, NASD, NYSE, NFA, etc.) 20% of hedge funds provide their investors access to the entire portfolio, up from 17% in 2002. Due to increased institutional demand, Hennessee Group addressed Information Technology (IT) issues in 2003 for the first time: Hedge funds rely on their internal IT team for middle and back office systems (40%) with prime brokers second at 25%. However, fund administrators are a close third with 24%, as hedge funds look for a way to consolidate services and benefit from price competition. With the institutionalization of the hedge fund industry, hedge fund managers view client reporting (21%) and risk management (21%) as their biggest challenges for which they would expect technology to provide a solution. “Our greatest concern continues to be the ability of the industry to absorb the incoming money flow without diluting the talent pool and thus hurting performance ,” notes E. Lee Hennessee, Managing Principal of the Hennessee Group. “However, most managers seem to have a good sense of their capacity limits, as the survey indicates.”