We take a look at the world’s largest hedge fund managers, the ‘$1 Billion Club’, to ascertain the characteristics and influence of the Club and to see how it has evolved in the past 12 months.
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In 2017 the hedge fund industry emerged from a challenging period, posting 12 consecutive months of positive performance and generating its highest annual return (+11.50%) since 2013 (+12.77%), an uptick from the disappointing returns in 2014 (+5.23%) and 2015 (+2.25%). Supported by a net inflow of $61bn since the start of 2017, industry assets under management (AUM) have reached a record high of $3.61tn as at March 2018. Assets managed by firms with at least $1bn in AUM have also surged over the past year, driven by the combination of improved performance and a return to inflows. In this article, we examine the 2018 ‘$1bn Club’ and how it has changed over the past 12 months.
The $1 Billion Club In 2018
Preqin’s online platform contains detailed profiles of 745 hedge fund managers worldwide with $1bn+ in AUM, a net increase of 44 managers since our May 2017 $1bn Club study (Fig. 1). Collectively, this group manages $3.17tn – an 11% increase from the previous year – accounting for 88% of all industry AUM. The number of participants in and aggregate AUM of the $1bn Club have increased by 30% and 14% respectively since May 2015.
In addition, the aggregate AUM of the 25 hedge fund managers raising assets of at least $20bn rose 23% (+$158bn) over the past year, and much of this growth was driven by new additions to the group. In our 2017 study, just 21 firms managed assets of $20bn or more. In contrast, the 532 firms managing $1-4.9bn only saw a 2% (+$20bn) increase over the same period, despite a net growth of 18 new managers to this cohort.
Location Of $1 Billion Club
North America is home to 516 (69%) of managers with $1bn+ in AUM, with these firms managing almost three-quarters (73%) of total $1bn Club assets. Of the managers based in the region, nearly half (49%) are headquartered in New York and are collectively responsible for $1.09tn (Fig. 2). The state also saw 12 firms enter the $1bn Club over the past year, including Westchester Capital Management, whose AUM rose from $713mn to $2.8bn (as at December 2017).
Connecticut-based firms saw the highest number (9) of dropouts from the Club over the past year along with a $12bn fall in combined AUM. Among this group is Astenbeck Capital Management (which managed $2bn at the time of our May 2017 study), which reported it would be ceasing its operations in August 2017.
Europe-based managers account for a fifth of assets managed by the $1bn Club. London remains at its centre, although the city has seen only two new entrants. When compared with our 2017 study, the aggregate AUM of London-based $1bn+ firms has increased by $87bn, the greatest amount of all $1bn Club manager locations, with Man Group’s total assets growing by 32% (+$18bn) over this period.
Strategies Of $1 Billion Club Managers
Equity strategies are the most prominent among those offered by $1bn Club managers (58%), reflecting the wider industry (Fig. 5). Credit and event driven strategies are also utilized by notable proportions of managers within the Club (26% and 25% respectively). JP Morgan Asset Management, Man Group and Oaktree Capital Management have each launched credit-focused hedge funds in the past 12 months.
The utilization of alternative risk premia strategies has gathered interest in recent years. Just 3% of the $1bn Club offer alternative risk premia strategies, while less than 1% of managers with less than $1bn in AUM utilize this strategy. However, such firms are poised for further growth in 2018: 31% of investors active in alternative risk premia plan to increase their allocation to the strategy over the next 12 months (as seen in the 2018 Preqin Global Hedge Fund Report).
Within the $1bn Club, the largest managers are more likely to have a diverse product offering, either through tactical acquisitions or by launching new products, in order to appeal to investors with differing appetites and preferences. Fig. 6 illustrates this, with 32% of managers with $20bn or more in AUM running 10 or more strategies.
New Entrants And Dropouts
Preqin has noted 97 new entrants and 37 dropouts in the $1-4.9bn AUM bracket over the past 12 months. Although there have been 20 fewer entrants to this AUM group compared to the previous year, there have also been 53 fewer departures, which reflects the improved environment for hedge funds in 2018 compared to 2017. North America accounts for the majority of new entrants (58%), as well as dropouts (62%), illustrative of the region’s dominance within the hedge fund industry (Fig. 8).
Fund managers offering equity strategies represent the largest proportion of both new entrants and dropouts to the $1-4.9bn AUM bracket in the past year (Fig. 9). In contrast with the previous year, a greater proportion of new entrants to the group offer macro strategies than dropouts, a trend explained by the strategy attracting significant inflows over 2017 (+$19bn), compared to outflows of $26bn and $5.9bn in 2015 and 2016 respectively.
Fund Terms And Conditions Of The $1 Billion Club
On average, managers with over $1bn in AUM command higher performance fees than those with less than $1bn (Fig. 10). However, the mean management fees commanded within the $1bn Club have fallen since our May 2017 study from 1.60% to 1.52%, which is notably lower than the 1.60% average among managers with less than $1bn. Average performance fees for $1bn Club managers have also fallen over the same period from 19.83% to 19.31%. As with many firms across the industry, $1bn Club managers have lowered fees and improved terms as a way of retaining capital and attracting new sources of funding. For example, Apollo Global Management, which has an AUM figure of $9.3bn, has reduced the performance fees charged for its long/short credit hedge fund Apollo Credit Strategies Fund from 20.00% to 18.00%.
Outlook For The $1 Billion Club
While small in number relative to the global hedge fund manager universe, this exclusive group is mighty in influence and continues to control the majority of AUM in the industry. Despite an influx of investor capital in 2017 (+$44bn) and in 2018 (+$16.9bn), $1bn Club managers are not immune to pressure from investors over fee structures and are likely to continue striving towards a better alignment of fund terms with investors.
Furthermore, while recent years may have been characterized by relative poor performance and wide-scale redemptions, the $1bn Club continues to evolve in the midst of a rapidly changing industry: the past year has seen growth in emerging sectors such as alternative risk premia as well as innovation in use of new technologies such as blockchain, artificial intelligence and machine learning techniques. The $1bn Club is looking to embrace all these technologies, as the hedge fund industry enters its next stages of evolution.
The $1bn Club looks poised to sustain its dominance within the hedge fund industry. While some investors remain cautious towards hedge funds, many believe the equity cycle may be reaching its peak and, as a result, will look to position their portfolios more defensively in 2018. The role played by hedge fund managers within investor portfolios, particularly the largest ones, may therefore continue to grow in 2018 and beyond.
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