Hedge Funds Manage 1% of Global Assets, 25-60% of Global Trading

by: Vincent Fernando, CFA

Just a good statistic taken from a recent report on the hedge fund industry put out by Dresdner Kleinwort (found via Barrons).

The authors point out that the roughly $1.3 trillion of assets hedge funds have under management represent over 1% of all the world's financial assets, but with leverage, the proportion may be greater than 3%, or in certain asset classes even higher. Their influence in global markets is much, much greater, thanks to their feverish activity and liberal use of leverage, whether via derivatives or margin.

On the latter score, U.S. hedge funds shoulder two-thirds or so of worldwide margin debt, or something in the neighborhood of $300 billion. Truly staggering, furthermore, is the Dresdner Kleinwort estimate that hedge funds account for between 25% and 60% of the trading in global major markets. And, we're reminded, it's the marginal trader that makes the market.

According to the analytical pair, transaction costs run to a not inconsiderable 4% of the assets managed by hedge funds, while manager salaries and performance fees take another 4%-5%. By any measure, that's one big nut. And it means, Stalmann and Knips reckon, that hedge funds must generate returns that average 20% a year. Which is neither a modest return nor an inevitable one.

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