25/11/2009 Author: Kapila Gohel

Hedge fund assets up 11% in last six months

Hedge fund assets have rebounded over the last six months, according to the results of HFMWeek’s latest assets under administration (AuA) survey, although the industry’s 11% gain may have more to do with positive performance and investor-led transparency demands than fresh inflows.

While single manager assets now stand at $2.4trn, funds of hedge funds (FoHFs) assets have also increased, contributing to a total AuA of $3.5trn and an overall industry growth rate of 8%.

Respondents to October’s HFMWeek biannual survey, who saw total single manager and FoHFs AuA grow from $3.2trn over the last six months, believe a cultural shift within the industry has pushed a number of large US managers – including Avenue and DE Shaw – to use the valuation services of independent hedge fund administration companies for the first time, lifting the value of assets dealt with by administration companies.
Manager migration to seek third-party valuations from large institutional allocators has spurred a recovery for the sector, which experienced massive outflows in the first six months of the year. However, according to a number of respondents, the increase in AuA is also being driven by 2009’s positive performance and investors slowly returning to the sector.

“The main drivers for growth have been good performance by the majority of funds, new business from self-administered funds and demand for enhanced services,” director of Citco Fund Services, William Keunen told HFMWeek. “We are also seeing some positive capital inflows as the redemption overhang emanating from the financial crisis has finally abated.”

While normalcy is clearly resuming, the latest survey shows a mix of results for individual administrators as some have been quicker to recover, while others have progressed gradually over the last six months. In total, the survey gathered responses from 77 firms with hedge fund administration businesses, including seven newcomers to the survey.

Global financial turmoil over the past two years led to a flurry of panic redemptions from hedge funds with the impact being fully felt in the industry earlier this year as hedge fund administrators, including those at the top of the pile, saw a fall in the size of their AuA. Citco Fund Services, the largest administrator, reported a 29% loss in assets, a trend that was experienced industry-wide.

Keunen said at the time that during this period, “the industry [had] experienced the full impact of the redemption outflow that occurred in December 2008 and the first quarter of 2009 timeframe, and, as a result, AuA diminished
significantly.”

Citco, still the number one administrator in the industry, has bounced back with a 15% increase in single manager AuA in the past six months as business recuperates. During this period the businesses single manager AuA increased from $325bn to $375bn.

Hedge fund performance has been strong this year, outperforming benchmark indices through the end of the third quarter, but like Keunen, Gary Enos, executive vice president and head of relationship management at State Street Alternative Investment Solutions, believes the new transparency is just as responsible for the sector’s rebound.
“Inflows have returned and optimism runs strong,” he said, “but the hedge fund industry is facing transformative change. Fund managers that once lacked confidence that third parties could handle the complexity of their work, today acknowledge that leading administrators can both service their assets and objectively endorse their soundness and security in an era of market uncertainty.”

Like Citco, State Street also gained a positive 15% increase in single manager AuA over the past six month period. During this period the bank’s admin unit grew from $195.6bn to $225bn, a welcome return from the 36% drop the firm experienced in HFMWeek’s last survey.

With hedge funds, pressured by investors, selecting more institutional-style administration companies, there is a widespread belief that the sector will experience a period of consolidation. According to HFMWeek sources, the number of working administrators is already shrinking, while there are already between “nine and ten live deals”, including Deutsche Bank’s expected tie-up with Fortis Prime Fund Solutions, underway, as firms scramble to build market share.