Tenth Hennessee Hedge Fund Survey Reveals 34% Industry Growth

by Phillip Morton, Investors Offshore.com

04 August 2004

The Hennessee Hedge Fund Advisory Group announced on Monday the publication of its tenth annual hedge fund survey, revealing 34% growth in the hedge fund industry in a strong year for the broad markets.

According to Hennessee, the industry as a whole, (excluding funds using 100% futures contracts) expanded from $592 billion to $795 billion as the number of funds grew 23% from 5,700 to 7,000. Broken down, 20% of this growth was due to manager performance and 14% came from new capital inflows.

Since 1987 hedge funds have generated an annualized return of +15.34% with 40% less volatility than the S&P 500 return of +12.11% over the same time period, the study found.

“The survey continues to dispel common misperceptions about hedge funds being ‘highly leveraged investment pools’ or that hedge funds ‘have a greater impact on the broad market than mutual funds or institutional, long only funds’,” stated Charles Gradante, Managing Principal of Hennessee Group LLC.

“Furthermore, hedge funds represent less than 2% of the world financial markets,” he added.

The 2004 survey respondents include 789 hedge funds from 174 management companies and over $144 billion in assets. However, the survey excluded CTAs who use 100% futures contracts since they predominantly take directional market risk without hedging.

Other key findings from the survey include:

• Individuals and family offices continue to represent the largest source of capital for hedge funds, comprising 44% of total industry assets.
• Funds of funds continue to be the fastest growing source of capital for hedge funds, increasing 810% since January 1997 (from $21 billion to $191 billion).
• Pensions investing directly in hedge funds have grown 453% since January 1997 (from $13 billion to $72 billion).
• Hedge funds reported they have the capacity to grow assets by 197% on average from current levels.
• On average, hedge funds have the highest short exposure (-50%) since 1999, when it was -55%, expressing concerns over the market’s explosive liquidity driven performance in 2003.
• In 2003, the average hedge fund’s gross exposure (longs plus shorts) was 141%, further dispelling the notion that hedge funds are a highly leveraged asset class.
• On average, hedge funds turned their portfolio over 3 times per year.
• 58% of hedge funds are registered with a regulatory agency (NASD, SEC, CFTC).
• 48% of hedge funds are registered as RIAs (Registered Investment Advisers), however, 39% are RIAs only while 9% are both RIAs and registered with at least one other regulatory agency.

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