Size matters in hedge funds

Financial Times

The hedge fund industry is becoming increasingly concentrated as investors put larger sums of money into the sector and allocate to bigger funds, according to Deutsche Bank’s 10th annual alternative investment survey. Half of the investors surveyed had more than $1bn in hedge funds, double the number in 2004, while 44 per cent said they invested with hedge funds that had more than $1bn in assets. By the end of 2011, approximately 5 per cent of hedge fund groups managed 90 per cent of total assets, according to the survey, which predicted the trend would continue.

This has been driven by the increasing institutionalisation of the hedge fund industry, according to Anita Nemes, global head of capital introductions at Deutsche. She said institutional investors had risen from 11 per cent of survey respondents 10 years ago to 36 per cent now. In addition, funds of hedge funds were increasingly reporting their capital was sourced from institutions.

Institutional investors demand higher levels of transparency and place more importance on operational infrastructure, said Ms Nemes, which can be easier to achieve for larger funds. Restrictions on the proportion of a fund that a single allocation can account for also helps larger funds.

Start-up funds are attracting more interest, with 17 per cent of investors saying they are willing to provide seed capital, compared with 14 per cent a year ago.

However, as it remains a much tougher environment for raising money than a decade ago, investors are more able to demand concessionary terms.

“Just 5 per cent of investors demand no concessions for early stage investment,” said Ms Nemes. Everybody else wanted something, she said, such as reduced fees or equity in the business. In 2004, almost half of investors were happy to get access to start-up funds without wanting extra concessions.

The trend towards size is also noticeable among start-ups. “Today you cannot realistically set up in business with less than $100m,” said Ms Nemes.

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