What a difference a global market meltdown makes.
At the beginning of this year, the firms that constitute Alpha’s 2009 Hedge Fund 100, our eighth annual ranking of the world’s biggest single-manager hedge fund firms, oversaw a combined $1.03 trillion in assets. Although by most measures that is a kingly sum, it is nonetheless down substantially from the record $1.35 trillion the world’s 100 largest firms managed at the end of 2007.
[To view the complete rankings of the World’s biggest hedge funds, click on 2009 Hedge Fund 100]
The falloff is hardly surprising, given that in 2008 hedge funds experienced their worst year ever. Industrywide assets tumbled by $525 billion from their mid-2008 peak, to finish the year at $1.4 trillion, according to Chicago-based Hedge Fund Research. The massive decline reflects both investment losses and redemptions. The HFRI composite index fell 19.02 percent in 2008, only its second annual loss since 1990, as two out of every three hedge funds lost money. The poor performance sparked a rush for the exits, which could have been even worse if scores of hedge funds had not erected gates to prevent investors from redeeming assets on demand.
“The story has been pretty well told — 2008 was the worst year ever in terms of performance, asset flows and liquidations,” says HFR president Kenneth Heinz.
Redemptions have been a challenge for most hedge fund firms, even those that managed to deliver positive returns last year, as investors have looked to raise cash where they can. In the fourth quarter of 2008, hedge funds saw a net outflow of $152 billion, according to HFR, with most of the assets coming out of bigger firms. In recognition of the new reality, we have changed the methodology for the Hedge Fund 100, using firm and fund asset totals as of January 1, 2009 (in the past we collected December 31 data). To qualify for Alpha’s 2009 Hedge Fund 100, a firm needed at least $4 billion in assets under management, compared with the $6.25 billion minimum a year ago. (New York–based Fir Tree Asset Management and London’s Polygon Investment Management tie for No. 100, with $4 billion in assets.)
All things considered, the very biggest hedge fund firms did remarkably well in 2008. The five largest firms managed a combined $156 billion in assets at the beginning of this year, down just 4 percent from the $163 billion they managed at the end of 2007. The ten biggest managed a combined $264 billion at the start of 2009, down nearly 12 percent from year-end 2007.
Raymond Dalio’s Bridgewater Associates claims the title of world’s biggest hedge fund firm from last year’s top-ranked JPMorgan Asset Management. Westport, Connecticut–based Bridgewater, whose Pure Alpha Strategy is very popular with institutional investors, manages $38.6 billion in hedge funds, up from $36 billion a year ago, when it was second. In 2008, Pure Alpha, which focuses mostly on credit and currency trading, delivered an 8.7 percent return, enabling Dalio to earn $780 million in our separate annual ranking of the world’s highest-earning hedge fund managers (“ Brother, Can You Spare a Billion? ,” April 2009).
New York–based JPMorgan saw its assets fall by 26.4 percent, to $32.9 billion, largely because of troubles at Highbridge Capital Management, which the bank bought in 2004. All but one of Highbridge’s funds were down last year — several by more than 30 percent — as the multistrategy firm suffered sizable redemptions despite its strong long-term track record.
“It is part of the cycle of hedge fund investing,” says Highbridge chief executive Glenn Dubin, who co-founded the firm with Henry Swieca in 1992. “If history is any guide, people tend to take money out at the wrong time, whether from the stock market or from hedge funds.”
John Paulson, one of the hottest managers during the past two years, continues to lead his firm up the Hedge Fund 100 ranking, even though its assets were largely unchanged at $29 billion. Paulson & Co. jumps five places, to No. 3, this year, edging out fellow New York–based firm D.E. Shaw & Co., which had $28.6 billion in assets.
Although Paulson & Co. was unable to replicate its incredible success from 2007, when most of its funds delivered investment returns in the triple digits, its performance last year was impressive. Most of its funds had double-digit returns, led by the largest, Paulson Advantage Plus, which surged 37.6 percent in 2008. Still, sources say that Paulson, which ranked No. 69 in the Hedge Fund 100 just two years ago, suffered redemptions, in part because it did not put up gates prohibiting withdrawals.
Paulson was not the only top performer to suffer redemptions. Many hedge funds that were up in 2008 and didn’t erect gates wound up being a source of cash for investors that were unable to get their money out of their losing funds. Caxton Associates founder Bruce Kovner saw his firm’s assets tumble 27 percent even though its biggest fund, Caxton Global Investments, was up about 13 percent last year. The New York–based firm drops to No. 51 from No. 16 two years ago.
Some managers with strong reputations but whose funds were down in the single digits last year also were punished severely, in large part because they have investor-friendly policies. William von Mueffling of Cantillon Capital Management, for example, saw his firm’s assets plunge to $5 billion from more than $9 billion, even though its two biggest funds were down 10 percent or less. Cantillon, which is based in New York and falls from No. 66 to No. 85, was hurt by the fact that it allows monthly redemptions in its offshore funds, where it has the bulk of its assets, and that the firm refuses to put up a gate.
Brevan Howard Asset Management was one of the biggest winners in 2008. Its assets soared nearly 28 percent, to $26.8 billion, helping the London-based firm, which was founded by Alan Howard in 2002, climb six places to No. 5 in the ranking. Last year its main fund — the $20.4 billion Brevan Howard Master Fund — delivered a 20.4 percent return for its investors. Brevan Howard also raised $1 billion in an initial public offering of BH Global, the firm’s second publicly listed hedge fund. Howard, who honed his trading skills at investment banks Salomon Brothers and Credit Suisse First Boston, now oversees the biggest hedge fund firm based in the U.K.
Thomas Steyer, who also began his career at an investment bank — in his case, Goldman, Sachs & Co., where in the 1980s he worked in the risk arbitrage group run by former Treasury secretary Robert Rubin — had a far less successful 2008 than Howard. The San Francisco–based manager’s firm, Farallon Capital Management, slips from No. 2 to No. 10 as a result of poor investment performance and redemptions. Farallon, whose hedge funds were down, on average, by about 24 percent in 2008, saw its assets plunge nearly 45 percent, to $20 billion.
“Like many funds, the Partnership has received an unusually high volume of withdrawal requests,” the firm told investors in a letter dated December 3, 2008, warning that it would not distribute all of the requested money. “Distributing substantially all of this cash to the withdrawing Partners would limit the liquidity of the Partnership and its flexibility to take advantage of new investments at a time when we believe there are severe market dislocations and excellent investment opportunities.”
Och-Ziff Capital Management Group, whose founder Daniel Och also worked in the risk arbitrage group at Goldman, saw its hedge fund assets drop from $33.4 billion at the end of 2007 to $22.1 billion at the start of this year. As a result, the New York–based firm, which ranked fifth last year, slips to No. 7. The plight of Och-Ziff illustrates why we changed our methodology. Through December 31, Och-Ziff saw its assets drop by $6.4 billion, some $5.7 billion of which was driven by investment losses (its flagship OZ Master Fund was down 15.9 percent). Assets at the start of January, however, fell by a further $4.9 billion, reflecting redemptions for December net of January 1, 2009, inflows. “We believe these redemptions were investors’ response to the continuing global financial crisis,” the company wrote in its 2008 annual report in March.
Not all firms whose funds suffered investment losses in 2008 had major redemptions, however. At Stephen Mandel Jr.’s Lone Pine Capital, No. 21 with $13 billion, assets fell nearly 28 percent. That, however, was in line with the performance of Lone Pine’s funds, as sources say that the Greenwich, Connecticut–based firm suffered minimal withdrawals.
Seth Klarman, the founder of Baupost Group, saw assets soar by more than 40 percent at the Boston-based firm, to $16.8 billion — the biggest percentage gain among ranked managers — enabling it to move up to 13th place from No. 49 a year ago. Although Klarman, a disciple of renowned value investor Benjamin Graham, experienced his first losing year in 2008 — his funds were down 7 to 13 percent — he had virtually no redemptions and is believed to have taken in new clients off Baupost’s waiting list for the first time in eight years.
Eighteen firms this year either make their debut on the Hedge Fund 100 or, like San Francisco–based Symphony Asset Management (No. 64), return after an extended absence. The notable new entrants include Horseman Capital Management (No. 66) in London and Houston-based Centaurus Energy (No. 85). Centaurus’s founder is John Arnold, the former Enron Corp. energy trader who was the third-highest-earning hedge fund manager in 2008, making $1.5 billion thanks to an 80 percent return on his flagship fund. Horseman founder John Horseman, who manages some $6.5 billion and whose largest fund was up 31 percent last year, made an estimated $180 million in 2008.
