Hedge Fund Report Shows Sector Booming In 2001

by Carla Johnson, Investors Offshore, London

11 March 2002

The Hennessee Hedge Fund Advisory Group ("Hennessee Group LLC"), a global hedge fund investment consulting firm advising individuals and institutions on over $1 billion in hedge fund assets, recently completed its 8th Annual Hennessee Hedge Fund Manager Survey. In the face of difficult equity markets, survey results indicate that the hedge fund industry grew 38% ($144 billion) in 2001 through manager performance and capital inflows, to a total of $563 billion.

"2001 was a pivotal year for the hedge fund industry as it was the first time a bear market has been met by a mature hedge fund industry," says Charles Gradante, President & CEO of Hennessee Group LLC. "The record $144 billion of inflows indicates investors are accepting hedge funds as a realistic alternative investment for the purpose of diversifying portfolios, capital appreciation, and managing downside risk."

Hennessee says that its survey, introduced in 1994, is the oldest, largest, and most comprehensive hedge fund industry survey. The 2002 Survey includes 766 hedge funds and over $141 billion in assets, equating to 25% of the assets in the hedge fund industry. The median hedge fund size in this year's survey was approximately $94 million.

Other findings in the survey include:

Hedge funds outperformed the broader equity markets in 2001, as the Hennessee Hedge Fund Index® advanced +3.98% net of fees, bringing the annualized return since January 1987 to 18%, versus the S&anp;P return of 13.6% over the same time period.

Hedge funds were able to avoid losses by holding high levels of cash and maintaining low market exposure. In 2001, the average hedge fund net market exposure was +49%.

After spiking up in 1994 and 1998, the use of margin in 2001 declined to its lowest level since the survey began in 1994. In fact, hedge funds used minimal margin in 2001, as the average long exposure decreased 8% to 83%.

Individuals remained the largest source of capital for hedge funds, contributing 48% ($270 billion) of total assets, but continued to decline from 80% ($79 billion) of total assets in 1994. Fund-of-funds were the second largest source of capital, contributing 20% of assets.

37% of hedge fund managers indicated that high net worth individuals and family offices were the fastest growing source of capital, while 25% specified corporations, 10% pension funds, 9% for both endowments/foundations and fund-of-funds, and 11% other sources of capital.

Due to the increased number of banks and insurance companies offering hedge fund products, 54% of hedge fund managers were Registered Investment Advisers in 2001, up from 47% in 2000.

With the significant increase of capital flowing into the industry, many investors are concerned about capacity.

"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, Chairman of the Hennessee Group. "However, most managers seem to have a good sense of their capacity limits."

The Hennessee Group, a pioneer in hedge fund investing, advises clients on over $1 billion invested across 125 hedge funds. All customized portfolios are built to meet the investment objectives and risk parameters of each client. Providing investment advice through "hands on" experience and offering direct client access to our managing principals, the Hennessee Group's only client is the investor. It does not market money managers or fund-of-funds products, nor is it a hedge fund tracker.

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