Hedge fund ranking reveals scars from crisis

A ranking of the world’s largest hedge fund managers sharply illustrates the ravages that the financial crisis wreaked on firms in the past two years.

It also shows how important assets from institutional investors are to the fortunes of many of these industry titans.

Sister publication Pensions & Investments’ list of the world’s largest hedge fund firms — those with at least $20 billion as of Dec. 31 — shows that assets managed by the 11 companies totaled $316.2 billion, virtually the same as the $316 billion managed by the 10 hedge fund managers that made P&I’s last ranking, based on data as of Dec. 31, 2007.

The flat growth disguises what clearly was a period of intense turmoil for many hedge fund managers, some of which were rocked by performance woes in the last months of 2008 and first few months of last year, as well as by client redemptions.

The result is that the composition of the list of the hedge fund managers with more than $20 billion under management changed significantly:

• Hedge fund assets of three prominent firms — Goldman Sachs Asset Management, Renaissance Technologies Corp. and Citadel Investment Group LLC — fell below the $20 billion cutoff, dropping the three from the ranking.

• Four hedge fund companies — institutionally oriented Brevan Howard Asset Management LLP and The Baupost Group LLC, as well as retail-focused Soros Fund Management LLC and Man Group PLC — joined the list.

• In addition to the three firms that left the top-manager list, three others remained above the $20 billion mark, despite suffering asset declines ranging from 30% to 43%. The collective decline of these six managers over the two-year period was $74 billion.

To compile its rankings, P&I gathered information from hedge fund companies and industry sources. To create a longer list of large hedge fund managers, P&I also scoured Securities and Exchange Commission filings and press reports, and interviewed industry sources. The complete list is available online at pionline.com/ hedge funds.

Holding its No. 1 ranking on the latest list was JPMorgan Chase & Co., which managed $53.5 billion in hedge funds as of Dec. 31 — $32.5 billion by J.P. Morgan Asset Management and $21 billion by Highbridge Capital Management LLC. This is an increase of 18.9% from JPMorgan’s year-end 2007 total of $45 billion.

Bridgewater Associates LP remained in second place, with hedge fund assets of $43.6 billion as of Dec. 31. Bridgewater was among the hedge fund managers that showed healthy growth during the period, rising 21%.

Paulson & Co. Inc. increased assets 10% to end last year with $32 billion, pushing the firm up to third, from eighth.

Filling the next three spots on the list are the three new firms: Brevan Howard and Soros, each with $27 billion; and Man Group, with $25.3 billion.

Paulson’s elevation in the ranking and the addition of the three new firms resulted from asset declines of the five managers that had filled the third through seventh spots on the 2007 list.

• Farallon Capital Management LLC experienced an asset decline of 42.5% and ended last year with $20.7 billion to rank 10th.

• Assets managed in hedge funds by Och-Ziff Capital Management Group LLC dropped 30.2% to $23.1 billion, moving the firm into seventh place.

• D.E. Shaw & Co. LP, which had held the fourth spot, slipped to eighth with an asset decline of 30.3% to $23 billion as of Jan. 1.

• Formerly in sixth place, The Goldman Sachs Group Inc.’s hedge fund assets declined 45.2% to $17.8 billion at year-end 2009, dropping the firm from the ranking. RenTech Inc.’s hedge fund assets fell 52.2% to $15 billion, moving it out of the ranking after having been seventh in 2007.

In the ninth slot is BlackRock Inc., which managed $21 billion in hedge funds as of Dec. 31. BlackRock’s presence is largely because of its acquisition last year of Barclays Global Investors Inc., which ranked ninth on the 2007 list, with $20 billion.

Citadel Investment Group LLC held the 10th position in the 2007 ranking, with $20 billion of hedge fund assets, but with assets totaling $12.2 billion of as Dec. 31, it fell off the list.

The fourth new entrant on the list, Baupost Group, just made the cut, with $20 billion under management as of Sept. 30, the most recent date for which data were available from an industry source.

P&I also analyzed, where possible, how much each of the largest managers managed for institutional investors, including pension funds, endowments, sovereign-wealth funds and institutionally oriented hedge-fund-of-funds managers.

Collectively, assets managed for institutional investors by the 11 largest firms declined 22% to $151 billion, or about half of total hedge fund assets as of Dec. 31, from $194.9 billion, or 62% of total assets two years earlier.

Bridgewater tops the hedge fund manager list sorted by institutional assets. All of Bridgewater’s $43.6 billion is managed for institutions.

In terms of institutional assets, Paulson follows, with $21.8 billion (68%); Brevan Howard, $21.6 billion (80%); D.E. Shaw, $19.1 billion (83%); BlackRock, $17.9 billion (85%); Och-Ziff Capital, $17.6 billion (76%); and Man Group, $7.8 billion (31%).

JPMorgan and Farallon both declined to break out institutional assets. Soros has a very minimal institutional clientele.

Despite the drop in the collective amount managed for institutions, hedge fund managers themselves reported that institutions remained their staunchest investors throughout the troubled period, though many pension funds, endowments and foundations were forced to redeem assets to meet liquidity needs during the credit crunch.

BlackRock’s experience over the past two years is “a microcosm of the hedge fund industry as a whole,” said Douglas Shaw, a managing director and head of BlackRock’s proprietary-alpha-strategies unit in London.

The BlackRock-BGI hedge fund family experienced “exuberant growth” prior to the market crash in 2008 and did lose assets that year from all investors, including institutions “that were selling what they could to get liquidity,” he said. BlackRock hit its trough last March — which Mr. Shaw declined to quantify — but began to see “solid growth” last spring, particularly from institutional investors.

Trey Beck, managing director at D.E. Shaw, said that corporate and public pension funds and sovereign-wealth funds have been adding to their hedge fund portfolios in the last year or so. Plus, the firm’s pipeline of new business is strong, and additional contributions from existing clients also are picking up.

D.E. Shaw recently won large allocations from three sovereign-wealth funds Mr. Beck declined to identify.

Sources said the fact that so many of the largest hedge funds manage so much for institutional investors is a signal that the hedge fund industry is maturing rapidly.

“As institutional investors have become more comfortable about hedge fund investing, the business is beginning to tip toward direct investment, especially among mid- to large-sized funds. The very largest managers definitely are the beneficiaries of this trend,” said vendor consultant Daniel Celeghin, partner in Casey Quirk & Associates LLC.

Christine Williamson is a reporter at sister publication Pensions & Investments.