Hedge Fund Industry Grew 26% in 2006

by Phillip Morton, Investors Offshore.com

15 May 2007

The Hennessee Hedge Fund Advisory Group, an adviser to hedge fund investors, has released the results of the 13th Annual Hennessee Hedge Fund Manager Survey, which indicates that the hedge fund industry grew 26% from $1.223 trillion to $1.535 trillion in 2006.

“Since 2000, industry growth has annualized at a 25% rate,” commented E. Lee Hennessee, Managing Principal of Hennessee Group LLC. “Despite the demise of several funds due to volatility in the energy markets, hedge funds experienced similar growth in 2006 as they have seen throughout the decade.”

Asset growth was the result of positive manager performance (+13%) and new capital inflows (+13%). In addition, the number of hedge funds grew 7% from 8,900 to 9,550 funds. Since 1987, the Hennessee Hedge Fund Index has generated an annualized return of +13.59% (net of fees and expenses) with approximately 43% less volatility than the S&P 500 Index, which returned +9.24% over the same time period.

“Despite the increase in assets and leverage throughout the industry, net exposures continue to remain fairly constant, indicating funds are finding a reasonable amount of short positions. However, we are seeing increased use of derivatives such as credit default swaps and ETF’s, which we feel will become more common as the ability to borrow stocks and bonds declines,” commented Charles Gradante of the Hennessee Group LLC.

Introduced in 1995, the Annual Hennessee Hedge Fund Manager Survey claims to be the oldest and most comprehensive hedge fund industry survey. The 2007 survey respondents include 605 hedge funds from 178 management companies, representing over $342 billion in assets. The Survey excluded CTAs who solely trade futures contracts.

Findings from the Survey included that:

Individuals/family offices and fund of funds represent the largest sources of capital for hedge funds, each comprising 32% of total industry assets. Corporations represent 12% of industry assets, while pensions represent 11%, and endowments and foundations represent 13%.

Hedge funds surveyed had an average long exposure of 109% and short exposure of -62%, indicating a low use of margin.

Hedge funds surveyed had an average gross exposure (longs plus shorts) of 171%, while net exposure (longs minus shorts) was +47%. 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.

87% of hedge funds are registered with at least one regulatory agency (NASD, SEC, CFTC, State), slightly higher than last year (86%).

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