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| March 1998 | The Coming Evolution of the Hedge Fund Industry | |||||
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II. Historical Perspective on the Hedge Fund Industry |
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| II.(a) Growth of the Hedge Fund Industry | ||||||
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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
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.
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| II.(b) Hedge Fund Industry Structure | ||||||
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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
Exhibit
9 B
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