Top Managers Monopolizing HF Assets, Preqin Finds

The world’s largest hedge fund managers are dominating the capital invested in the asset class, according to Preqin.

The data provider found the top 11% of managers controlled 92%—or $2.78 trillion—of total hedge fund assets at the end of Q1 2015. These 570 managers also each held at least $1 billion in assets, qualifying their membership of the “$1 billion club”.

“The $1 billion club has continued to grow over the past 12 months, both in terms of the assets they command and their influence on the hedge fund industry,” said Amy Bensted, Preqin’s head of hedge fund products.

Of these top firms, more than 400 managing $1 billion to $4.9 billion collectively controlled $892 billion while 22 managers with $20 billion or more, had $790 billion all together, the report said.

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Older managers with a “consistently strong track record over many market cycles” were prominently featured in the $1 billion club, Preqin found. On average, managers with more than $20 billion were established in 1992.

These larger firms are also able to offer a wide range of strategies, the report said, allowing managers to benefit from diversification to generate even greater absolute returns.

According to the report, 41% of managers with more than $20 billion in assets offered four or more strategies while half of managers with $1 billion to $4.9 billion only provided a single core strategy.

The newer firms in this group of leading hedge fund managers were likely to show excellent performance over a shorter term to attract capital or spin out from older and larger firms.

Such links to larger hedge fund firms allowed newer managers to bring on existing track records and even some executives, the report said, to help establish trust and assurance with investors.

Preqin ranked Bridgewater Associates as the world’s largest hedge fund, with $169.5 billion in assets under management. AQR Capital and Man Investments came in second and third, managing $64.9 billion and $50 billion respectively.

Preqin HF

Investors turning to emerging market debt to diversify their fixed income portfolios could be taking on additional—and unrewarded—risks, a fund manager has warned.

HSBC Global Asset Management’s (HSBC GAM) emerging market fixed income team voiced concern over some areas of the asset class, including illiquid “frontier” debt and corporate issuers.

“If there is a correction in emerging markets—which we are anticipating—corporate debt will be hit hardest.” —Brian Dunnett, HSBC GAMBrian Dunnett, fixed income product specialist at HSBC GAM, said spreads in the emerging market debt sector were “historically tight”, leaving several countries vulnerable to a sell-off when the Federal Reserve begins to raise the US base interest rate. Many small, illiquid sovereign bond issuances were trading “at or above par”, Dunnett said, meaning valuations were not compensating investors for credit or liquidity risks.

It was a similar story in corporate debt, Dunnett added, with emerging market corporate bonds trading significantly below their historic trend versus sovereigns. The spread above US corporate bonds was also near historic lows, he said.

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“If there is a correction in emerging markets—which we are anticipating—corporate debt will be hit hardest,” Dunnett added. “You can get that extra yield, but given the fundamentals it is not an attractive prospect right now.”

The warning follows similar downbeat fixed income forecasts from ratings agencies Fitch and Moody’s in recent weeks.

A research note from Fitch Ratings said European fixed income funds may be tempted to overreach in an effort to boost yields, “potentially loosening selectivity in credit and leading to excessive risk taking”.

Moody’s highlighted that some large emerging markets—including Brazil, Turkey, and South Africa—“look challenged” by the prospect of higher US interest rates.

The yield on Germany’s two-year government bonds has fallen into negative territory over the past 12 months to -0.22%, while five-year German bonds yield only 0.05%, according to Bloomberg data.