The Incredible Shrinking Hedge Funds Universe

The number of hedge funds has been shrinking over the past two years, despite assets in the sector increasing, research has found.

Between 2012 and 2013 there was a drop of more than 6% in the number of hedge fund firms reporting assets and results to eVestment’s database, the company said today.

This represented a fall of 194 firms over the twelve months.

Broken down into firm types, it was the multi-fund firms that disappeared in the greatest numbers. These included firms running managed futures and commodity trading advisor vehicles.

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The amount of firms managing three funds dropped by 21.1% over the 12 month period, followed closely by a 19.8% fall in the number of those managing two funds.

Single fund managers only lost 2.2% of their community, while firms managing four or more funds lost peers, but the number of them dropped by just a few percentage points.

Despite fewer players, assets in the sector have continued to grow since the financial crisis.

“Reported single-manager hedge fund assets increased by $262.5 billion in 2013,” eVestment’s report said. “Funds with, or exceeding, $750 million in assets under management accounted for 100.6% of this reported rise (smaller fund declines were offsetting of the total) and nearly 84% was concentrated in the $1 billion or larger group. New allocations, performance-based gains, and hedge funds reporting asset information for the first time or improved master asset data helped elevate the total reported assets under management.”

The number of fund of hedge fund firms dropped by 8.3% over the period, while companies offering both single manager and fund of hedge funds strategies fell by 12.3%.

Last month, Credit Suisse reported that 97% of a selection of investors would allocate to hedge funds in the second half of the year, as equity and bond markets continued to disappoint.

Plan sponsors should consider the fit of funding relief within current investment strategy before undertaking more risk, according to Cambridge Associates.

The latest pension funding relief measure—signed into law by President Obama in August—is unlikely to substantially change plan asset allocation and investment strategy, according to Cambridge Associates.

The 2014 highway bill intended to provide plan sponsors with flexibility, allowing higher discount rates to value a plan’s liability “for the purpose of determining minimum required contributions,” the firm said. An extension of the Moving Ahead for Progress in the 21^st Century Act (MAP-21), the law will provide relief until 2021 and dramatically mark down a plan’s liability—up to 15% in 2015, 2016, and 2017.

“Sponsors sensitive to the financial statement impacts of being underfunded or that are seeking to terminate their plan must weigh the near-term consequences of lower contributions,” Cambridge Associates said.

Certain plan sponsors may see new regulations as an opportunity to take on more risk, the report said, largely through reducing fixed income allocations or the duration of bonds in the portfolio.

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For these plans considering changes in their strategies as a response to the legislation, the consulting firm recommended a few “plan-specific factors” to review first.

The higher rates under the relief act apply only to calculating mandated contributions, the report said, and not to valuations of potential risk transfers, plan termination, or lump-sum payments.

“Sponsors sensitive to the financial statement impacts of being underfunded or that are seeking to terminate their plan must weigh the near-term consequences of lower contributions,” it said.

The firm also warned the extended relief merely defers required contributions and does not decrease the total amount of contributions over the long term. For underfunded plans, this means higher minimum contributions in the future and a delay in reaching a fully funded status.

Plan sponsors must also take into consideration the increased Pension Benefit Guaranty Corporation premiums under MAP-21—costs that must be paid through “existing assets or from additional contributions.”

Cambridge Associates said given the unpredictable interest rate environment, it is difficult to tell how long the relief will last. “If interest rates rise rapidly, [the higher rates under the relief act] could be replaced by the more marked-to-market 24-month Pension Protection Act rates sooner than expected,” the report said.

Goldman Sachs Asset Management took a similar stance, contending that the new regulation’s limited scope would continue to incentivize de-risking and liability-driven investing strategies. A key focus for many sponsors remains minimizing accounting funded status volatility and its effect on the plan’s balance sheets, the firm said.