The one trend market pundits seem to collectively be predicting with ease for the hedge fund industry is so-called consolidation.
Which is why a list of the 100 largest U.S. hedge funds, ranked by equity assets, buried deep in Goldman Sachs’ (GS) recently released report on the state of the hedge fund industry, caught my late summer-diverted attention.
Among a few of the highlights of the 47-page report: U.S. hedge funds now have net long exposure near levels not seen since before Lehman Brothers’ collapse; that hedge funds now own 3.7% of the financial sector’s market capitalization; that 7% of hedge funds have closed since the financial crisis set in; and that managers collectively boosted ownership in financials by 55% on a quarter-over-quarter basis to $70 billion, with Bank of America (BAC) the favored stock pick.
Much farther into the report, however, is a snapshot that in and of itself provides confirmation of what many have been calling for in the industry for the better part of a decade: rationalization.
According to Goldman’s sampling, of the 100 top hedge funds, only five have more than $10 billion in equity assets under management. Another 12 have more than $5 billion in AUM, while 19 have more than $2 billion in AUM. Thirty seven have $2 billion under management, while the remaining 27 have $1 billion in AUM.
Renaissance Technologies LLC ranks No. 1 on the list, with $24 billion in equity-based assets, followed by D.E. Shaw $19 billion, Paulson & Co. with $16 billion, Adage Capital Advisors with $15 billion, Fortis Investments Management USA Inc. with $11 billion and ESL Investments Inc. with $11 billion.
The broader theme of the report is that hedge funds will continue to readjust their risk parameters, slowly taking on more by boosting their long-only equity exposure, as well as their short positions. What the report doesn’t directly touch on is the number of firms – and the average level of assets under management – that are or are about to engage in the re-risk process.
What the report is also indicative of, at least in terms of its measurement of the top 100, is the new and more sober landscape of what types of hedge fund firms will survive and thrive in the post-credit-crisis and market meltdown world.
To be sure, the sampling only looks at equity assets under management, and it only looks at U.S.-based funds. But the results paint a very interesting picture: The days of multitudes of multi-billion-dollar long/short hedge funds are over – at least for now.
Indeed, what Goldman’s “Appendix D” ranking illustrates quite nicely is the top 10 hedge fund firms in terms of equity assets under management are light years ahead of any of their competitors, while those in the $1 billion to $2 billion category are equally well ahead of their multiple-million brethren.
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In other words, the big are getting bigger, the small are staying smaller and those in the middle are shrinking.
It will be interesting to see if this is still the case a year from now. Even more interesting, and a topic we’ve touched on before, is whether the divergence between big and small will do anything to help returns.
