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- International Research Firm Estimates that Industry Revenue from Financing, Stock Loans and Other Prime Services to Surpass Other Institutional Business Lines by 2010
- Although 44% of Funds Cite Volatility’s Negative Impact, Hedge Funs Plan to Open as Many as 800 Offices around the Globe, Launch New Funds and Trade New Markets
Growing enthusiasm for hedge funds to the tune of $1.8 trillion in the US alone, paired with a profitable fee structure and positive returns, has given the hedge fund industry the capital to extend its influence. As the snowball effect of assets and profits turns into an avalanche, competition for hedge funds’ business continues to grow fiercer. According to TABB Group in its fourth annual benchmark industry research study published today, “Hedge Funds 2008: Perspectives on Prime Brokerage, Volatility and Expansion,” prime brokerage units “will reel in more than $11 billion revenues from hedge funds in 2008, a 15% increase over 2006.”
Matthew Simon and Monica Schulz, research analysts and co-authors of the study, add “TABB Group estimates industry revenues generated from financing, stock loan, custody and other prime services will surpass other institutional business lines by 2010, in particular the cash equity business, which is hovering around $12 billion a year.” (see attached slide)
While the current credit crisis has already exposed the Achilles’ heel of many companies while simultaneously enriching the few, hedge funds have proven to be fashionably client-oriented, pro-actively calling clients and arranging face-to-face meetings to diffuse concerns and avoid panic. In fact, write Simon and Schulz, although “more than 40% reported that volatility negatively impacted returns,” the majority of funds plan to reduce or maintain near-term exposure. In addition, they are planning on a continued expansion of their business, including opening up offices around the globe, as many as 800 depending on market conditions, launching new funds and trading new markets.
“Hedge funds of all stripes and sizes,” says Adam Sussman, TABB Group’s director of research, “are following best practices when it comes to operational functions such as investor relations and risk measurement. This is not just a sign of the times, but an indication that the hedge fund industry has matured.” He adds, “Although there are thousands of poseurs that dare to call themselves a hedge fund with nothing more than an Internet connection and a partnership agreement, the true industry players have seen significant growth over the last year, with the average fund approaching $4.5 billion AuM, rising from $1.85 billion in 2006.”
The information for this study was gathered through in-depth interviews with 61 US-based hedge funds from January to March 2008. Participants had a combined $US227 billion in assets under management (AuM), representing approximately 15% of the total US-based hedge fund assets. Forty-nine percent of participants were managing at least $1 billion AuM. Funds were segmented by size into three categories: small-size managers with less than $500 million; medium-size funds between $500 million and $3 billion; and large-size funds managing more than $3 billion AuM.
The 49-page study with 40 exhibits covered leveraging volatility; deleveraging; frequency of measuring risk models; asset class investment areas; percentage of multi-asset class firms; allocating business to prime brokers; paying for equity execution; trends in the number of executing brokers; order flow allocation; firms with the top two-year CAGR in prime brokerage market share; use of broker algorithms; weakness of primes; prime brokers’ services marketed; prime brokers aggressively marketed; stock lending; top three executing brokers; expansion challenges; geographic investment areas; regional versus international expansion; raising capital; sources of new money; and launching new funds.
The research can be downloaded by TABB Group Research Alliance Equity clients and qualified media at https://www.tabbgroup.com/Login.aspx. To request an executive summary or to purchase the report, please visit http://www.tabbgroup.com or write to info@tabbgroup.com.
