So far 5 months in it’s been sunny for $2.13 Trillion hedge fund industry
Five months in and it’s been sunny year for hedge funds so far with the HFRI fund weighted composite index up 4.4% YTD following its strongest first quarter performance since 2006. The index fell 5.25% last year.
How They Measure Hedge Fund Industry?
1. Assets reported to a hedge fund database are summed with information gathered from various external sources, the result of which is assumed to be a certain fraction of the industry. The sum is then factored up to produce an estimate of total industry size.
2. A survey of specific industry participants is conducted and an assumption is made about the portion of the industry for which they account. Refined survey results are factored up to produce an estimate of total industry size.
3. A firm takes the results of Method 1 or Method 2, or a combination/average of the two, applies a proprietary change and presents it as original.
The key to accuracy is making the smallest assumptions possible. Let’s look at the assumptions required for Methods 1 and 2, disregarding Method 3 because it has no sound basis. Method 1 utilizes a hedge fund database, external collection efforts and a factor assumption. The immediate issue is that the majority of the largest firms may not report to commercial hedge fund databases. Those that do may or may not report all of their hedge fund products and for those products they do report, they may or may not include current AUM. External collection efforts face the same hurdles in accuracy and breadth. A factor assumption, assuming data summed is X % of the whole pie, is based on the quality of the efforts in parts one and two. It is evident the assumptions being made are numerous and large. Surprisingly, the most widely quoted industry AUM estimates are produced using Method 1.
Method 2. Twice a year, currently in its 10th iteration, more than 60 hedge fund administrators, including all of the largest, are surveyed to report hedge fund assets under administration (AuA) along with, but separate from fund of funds, UCITS and Other Alternatives AuA, which includes private equity and real estate. The hedge fund portion of the survey results are refined to take into account reporting anomalies such as the exact month through which information is compiled and submitted. These and other refinements are the result of direct communication with administrators. The refined AuA figure is increased by an estimate of what % of hedge fund assets are administered externally to produce an estimate of total hedge fund AUM.
Method 2 addresses the accuracy and breadth issues with Method 1. A primary function of administrators is to provide funds and investors precise accounting of their holdings and balances and the vast majority of the industry utilizes external administrators. In a post Madoff world, funds are typically required to have external administrators to receive large allocations. Additionally, when new funds are launched or when funds are liquidated, the information feeds through fund administrators, whereas this information is rarely available elsewhere. Read Hedge fund Math
Best performance YTD was Fixed Income convertible arbitrage index, which is up 6.37% after falling 5.16% last year. But macro funds are having something of a meh-time. They’re up 0.34 per cent so far this year.
There was a small 0.36% fall last month, but it’s unlikely to deter investors who have been scrambling to take advantage of the strong start to the year. Total hedge fund capital reached a dizzying record $2.13Trillion at the end of last quarter on a mix of performance and net inflows, according to HFR estimates.
Shorting equities has been the worse this year. The HFRI short bias index is down 9.54%, more than any other strategy index by some way — that follows losses of 18% in 2010, 24% in 2009 and a tiny increase of 0.35%last year.
Total equity hedge index is up 6.33% YTD. That compares to the S&P 500 rise of almost 9%.
Merger arbitrage index is 1.44 % higher year to date, even after a 0.25% drop last month in spite of April being the most active month for M&A since last October.
This upward trend may become something of a theme in the post-Volcker rule world. As the big banks pull their prop trading desks out of merger arbitrage, there’s less competition and wider spreads.
Look at the Hedge Fund Mergers & Acquisitions