Dr. Rama Rao

RRCM


EXCEL

Financial Physics

financial physics

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Hedge Fund Industry
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Praise for the book

"A provocative study that makes one think about the future structure of the hedge fund industry. A timely study released as major deals are coming to light." Lois Peltz, Managing Editor-MAR/HEDGE

 

"Exceptionally solid work, clear reasoning and well documented. Conclusions are both logical and insightful." Hunt Taylor, Executive Director- Tass Management, Inc.

 

"This report addresses the rising tide of wealth in the U.S. and the bright future for alternative asset managers going into the next century. It also suggests we may begin to see a consolidation among alternative asset managers similar to what has been occurring in the traditional asset management industry over the last decade." H. Bruce McEver, President-Berkshire Capital Corp.

 

"I read the report with admiration and recognition. It presents a very credible vision of the future of the hedge fund industry." Arthur J. Samberg, Chairman & CEO- Dawson-Samberg Capital Management, Inc.

 

"This is a wonderful report on the hedge fund industry and the evolution concept is well articulated. We believe one day it will be considered imprudent not to hedge. Interestingly, Harvard, Yale, Stanford and Duke Universities already subscribe to that philosophy." E. Lee Hennessee-Hennessee Hedge Fund Advisory Group

 

"This report puts a unique perspective on the hedge fund industry, and shares insight that was not previously available anywhere." Peter W. Testaverde Jr., Partner Financial Services Group- Goldstein Golub Kessler & Co.
Click Here to read "The Coming Evolution of the Hedge Fund Industry" Contact Us Contents Authors Report Preface Summary Section i Section ii Section iii Section vi Section v References
March 1998 The Coming Evolution of the Hedge Fund Industry

II. Historical Perspective on the Hedge Fund Industry

II.(a) Growth of the Hedge Fund Industry

Because of the private nature of hedge funds and regulatory disclosure requirements, definitive data on the size of the market and number of hedge funds is not readily available. Many estimates place the total number of funds in operation worldwide at over 2,300 with some estimates approaching 5000(3,5,10). The total assets under management of the industry range between $140 and $250 billion (5,11).

Although the US equity market with a total capitalization of over $6.8 trillion (12) dwarfs the hedge fund market in size, hedge funds have far surpassed the equity markets in recent growth. In the US, total equity capitalization from the beginning of the 1980’s through today has grown at less than 13% (9). Hedge funds on the other hand, have experienced 24% growth over the same period (4,5).

According to extensive research conducted by Dr. Philip Cottier and his group at the University of St. Gallen ((5) , hedge funds entered a period of accelerated growth in the early 1990’s after a few decades of relatively modest growth. The number of funds grew tremendously from under 500 in 1990 to over 2500 in little more than five years.

The growth in hedge fund assets has paralleled the growth in number of funds. The decade of the 1990’s has seen a phenomenal acceleration of growth in the hedge fund industry with new funds being formed at the rate of some 42% per year while assets have increased at the rate of 37% annually.

Exhibit 8
Growth of the Hedge Fund Industry
1960-1996

chart

Source: Cottier

The asset growth has come from new money invested in this class of investments as well as internal growth from the reinvestment of returns. Asset growth dipped slightly in 1994 due to relatively poor performance of hedge funds and the market overall, as well as the high profile failure of some large hedge funds such as David Askin’s Granite Fund.

 

II.(b) Hedge Fund Industry Structure

The hedge fund industry today is very fragmented and made up primarily of individual funds, each with their own investment strategy, market identity and support infrastructure. As discussed above, the number of new funds being formed has skyrocketed in the 1990’s. While the biggest funds control a large portion of total hedge fund assets, there are a large number of relatively small funds. For example, more than one third of the estimated 2,500 hedge funds have less than $10 million of assets under management. The industry appears to be concentrated at the top and very fragmented at the bottom. The largest 15% of hedge funds control over 80% of total assets (13).

Exhibit 9A
Hedge Fund Assets Under Management by Fund Size

Image45.gif (2789 bytes)
Source: MAR/HEDGE

Exhibit 9 B
Number of Hedge Funds by Asset Size

Image46.gif (2726 bytes)
Source: MAR/HEDGE

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