More than 500 hedge fund managers currently each manage $1 billion or more in assets, according to the alternative-assets research firm Preqin.
These firms represent about 90% of total industry assets, comprising a significant proportion of all capital managed by hedge funds.
Recent positive performance and investor inflows have fattened hedge fund coffers to approximately $2.7 trillion. Volume is also increasing: more than 4,600 fund managers now manage upward of 10,500 funds, up from 4,150 managers running some 10,000 funds in May 2013.
In a new report, Preqin examines what it takes to stride the towering heights of the industry and be a member of the “$1 Billion Club.”
Preqin research found that the largest hedge fund managers typically have the longest track records, demonstrating that they could perform consistently through many market cycles and surpass various competitors.
The study noted that the median establishment date of managers with more than $20 billion under management was 1991, making them brand names.
The mean establishment year for managers with $1 billion to $4.9 billion in assets was 1997.
Some 54% of fund managers with more than $1 billion in assets have been established since 2000, with the newest ones founded in 2012. No fund managers that launched in 2013 are known to have reached the $1 billion mark.
Besides long track record, strategy choices emerge as another pattern in the $1 Billion Club. Forty-two percent of all funds managed by club members use long/short, the predominant strategy.
Whereas 46% of managers in the $1 billion to $4.9 billion range employ long/short, only 32% of those with more than $20 billion in assets do so.
Long/short funds can have capacity constraints because of limited investment opportunities restricted by geography or section in which the manager invests. The same is true for niche strategies, which explains why only 3% of funds belonging to managers with more than $20 billion use them, Preqin said.
Beyond long/short, the largest managers also use multi-strategy and macro strategies. Forty-one percent of the $20 billion plus managers use at least one of these for their funds, most likely, Preqin said, because they offer a wide range of opportunities in a variety of geographies and sectors, meaning they have a larger capacity.
The multi-strategy approach is less prominent among smaller managers compared with strategies such as long/short equity; just 8% of funds managed by firms with $1 billion to $4.9 billion in assets use a multi-strategy approach.
Specialize or Diversify?
Midsize managers face a dilemma. They can offer a diverse range of strategies in order to appeal to a wide group of investors, but take on the burden of staffing up with more portfolio management experts and specialized sales staff across the various strategies. Or they can specialize in a small number of strategies, aiming to be among the best in the market.
According to Preqin data, the very biggest managers are choosing between the two, with fewer opting for a middle approach.
Of all those with more than $20 billion in assets, 29% offer a single strategy through their funds, while 38% offer six or more. Only 8% provide exposure to four or five strategies.
Managers with $1 billion to $4.9 billion are more consistent, with more than half offering a single strategy.
Very few funds outside the $20 billion-plus category offer 10 or more strategies.
$1 Billion Club Headquarters in New York
New York has the largest proportion of fund managers with more than $1 billion in assets, according to Preqin, with 174 managers managing aggregate assets of $938 billion.
London is the main $1 billion hub outside the U.S., with 80 fund managers managing a total of $346 billion in assets. Sao Paulo is the biggest South American hub, with large managers such as Credit Suisse Hedging-Griffo and BTG Pactual primarily employing macro strategies.
Top 10 Fund Managers
According to Preqin, these are the top 10 hedge fund managers, their location and their assets under management:
- Bridgewater Associates, U.S., $157.2 billion
- AQR Capital Management, U.S., $53.3 billion
- Och-Ziff Capital Management, U.S. $43.5 billion
- Brevan Howard Capital Management, Jersey, $40 billion
- BlueCrest Capital, U.K. $35.8 billion
- Standard Life Investments, U.K, $33.1 billion
- D.E. Shaw & Co., U.S., $32 billion
- BlackRock Alternative Investors, U.S., $31.3 billion
- Viking Global Investors, U.S., $28.1 billion
- Man Investments, U.K., $26.7 billion.