The 2005 Hedge Fund 100
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The 2005 Hedge Fund 100

Institutions continue to swoon for hedge funds, despite some uninspiring returns.

Investment returns may be moderating, but hedge funds keep piling up assets.

The firms that make up the 2005 Hedge Fund 100 (as originally published in Institutional Investor's Alpha), our fourth annual ranking of the world's largest hedge fund management firms by assets, saw a 29 percent gain in assets under management -- to $568 billion in single-manager hedge funds as of December 31, 2004, up from the $439 billion managed by the firms on last year's list. That's almost identical to the asset growth posted by last year's Hedge Fund 100 firms in 2003.

Capturing first place in the 2005 Hedge Fund 100 is San Francisco­based Farallon Capital Management, with $12.5 billion in assets under management. Farallon rises from fourth last year to dislodge Caxton Associates of New York, which held the top spot in the 2004 and 2003 rankings and slips to tie New York­based D.E. Shaw Group for No. 7, with $10.8 billion in assets. Caxton returned about $2 billion of its single-manager hedge fund assets to its investors at the beginning of 2004.

Bridgewater Associates of Westport, Connecticut, captures second place, with $11.5 billion, compared with tenth place last year. New York­based Goldman Sachs Asset Management soars into third place, with $11.2 billion in single-manager hedge fund assets, up from No. 28 on last year's list, when it had $5.4 billion. The firm says that about $2 billion of the increase comes from investments by new customers or investments by existing customers in new funds. The remainder consists of inflows into customers' existing accounts and capital appreciation.

Goldman edges out last year's No. 2, GLG Partners of London, whose $11.2 billion puts it in fourth place. Moving into fifth place is London-based publicly traded hedge fund firm Man Investments, with $11.1 billion in single-manager assets as of December 31, 2004. Man climbs from No. 14 last year, thanks to a strong surge of interest from high-net-worth individual investors from the Far East, particularly Japan.

The very biggest managers continue to grab an increasing share of all hedge fund assets. Of the $973 billion in total assets that Chicago-based Hedge Fund Research estimates the industry managed as of year-end 2004, the Hedge Fund 100 firms account for 58 percent, up from 54 percent last year.

The industry's growth comes despite overall returns that lagged the market's. In 2004 the MSCI asset-weighted composite index of hedge fund returns posted a 7.3 percent gain, compared with a 10.9 percent total return for the Standard & Poor's 500 index. In the first quarter of this year, when, HFR estimates, industry assets surpassed the $1 trillion mark, the MSCI asset-weighted hedge fund composite eked out a 0.66 percent return, compared with losses of 2.15 percent for the S&P 500 index and 1.55 percent for the MSCI world index. The hedge funds' slim first-quarter returns certainly "didn't shoot the lights out," admits David Anderson, managing director at GAM, a London-based unit of Zurich-based banking giant UBS that manages $19.5 billion in funds of hedge funds. "But that was better than if you were just invested in U.S. or global equities," he says, "and there was less risk."

How much more can hedge funds grow? Huw van Steenis, an analyst covering European asset management equities in London for Morgan Stanley, believes the industry's asset growth has peaked. In a recent report he wrote that firms he interviewed expected to draw net new money in 2005 equal to 10 to 15 percent of their capital at the opening of the year, down from 15 percent net new money in 2004. Falling returns coupled with stiffening fees could turn off investors, says Michael Peskin, head of Morgan Stanley's global asset-liability strategies group in New York: "At some point people will become disillusioned."

That day does not seem imminent. Five years ago pension plan interest in hedge funds was minimal, according to Casey, Quirk & Associates, a Darien, Connecticut­based management consulting firm. Today defined benefit plans are the fastest-growing segment of the institutional market and account for about 40 percent of institutional hedge fund capital; CQA expects that proportion to grow to more than 65 percent by 2008.

Naturally, those continuing pension inflows are attracting newcomers to hedge fund management. "There are a lot more managers we have to look at," says GAM's Anderson. "We've almost doubled our fund-of-funds team so we could have more horsepower to get out and look at new managers." For the time being, at least, hedge funds need not worry about where their next dollars are coming from.

This ranking was compiled under the direction of Director of Research Operations Group Sathya Rajavelu, Assistant Managing Editor for Technology and Development Lewis Knox, Assistant Managing Editor for Research Evan Cooper and Senior Editor Jane B. Kenney, with Associate Editor Carolina Santos and assistance from Contributing Editor Stephen Taub and Researchers Normand Morneau and Theodore Howard. To request a questionnaire for next year's Hedge Fund 100, e-mail your contact details to

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