Join the Rich Man’s Hedge Fund Club for Cheap

by Bryan Perry | April 28, 2011 11:10 am

The wave of money coming back into risk-adjusted equity funds is real. In mid-April, it was reported that hedge funds amassed over $2 trillion in capital for the first time ever in the first quarter of 2011.

The global hedge fund industry now controls $2.02 trillion worth of total assets, according to Hedge Fund Research, up $102 billion from the first quarter of 2010. This is more than the industry had in the second quarter of 2008, when assets peaked at $1.93 trillion.

As a reference to the recession, hedge-fund assets dropped to $1.41 trillion in 2008. As of 2010, hedge funds represented 1.3% of the total funds and assets held by financial institutions.

By definition, a hedge fund is a private investment fund, which may invest in a diverse range of assets and may employ a variety of investment strategies to maintain a hedged portfolio intended to protect the fund’s investors from downturns in the market while maximizing returns on market upswings. As a class, hedge funds undertake a wider range of investment and trading activities than traditional long-only investment funds, and invest in a broader range of assets.

Most hedge fund investment strategies aim to secure positive return on investment regardless of overall market performance. Hedge fund managers typically invest their own money in the fund they manage, which serves to align their interests with investors in the fund. Investors in hedge funds typically pay a management fee that goes toward the operational costs of the fund, and a performance fee when the fund’s net asset value is higher than that of the previous year. The term “two and twenty” comes to mind when describing most hedge fund fee structures. A 2% management fee and a 20% performance fee are the most widely utilized structure.

Because almost all hedge funds are only open to accredited investors or institutions and closed to retail investors, the only way for individual investors to get in on this rich man’s club is to own publicly traded hedge funds and private equity firms. In doing so, we become passive owners of very bright pools of talent that oversee an array of hot investments that throw off sizeable dividends and grow capital consistently.

In an alternative-investment survey published recently by Deutsche Bank AG (NYSE: DB[1]), it expects funds to attract $210 billion in net inflows in the year, nearly four times the $55 billion recorded last year. Together with a 7.6% expected average performance of funds, Deutsche Bank said hedge funds will manage a record $2.25 trillion in assets by year’s end. Part of the increase in hedge-fund assets may come from investors putting more cash to work. Deutsche Bank said investors it surveyed expect to reduce their cash position during the next six months by $29 billion.

Provided the industry is not affected by events that generate negative publicity and headline risk, hedge funds are poised to continue to become an increasingly significant part of the asset-management industry. More than 70% of pension funds and more than half of all consultants are increasing the size of teams that are dedicated to hedge funds, translating to robustly higher management and performance fees.

At the end of 2010, the 10 largest hedge funds in the world were:

Assets ($MM)
1 Bridgewater Associates LP[2] $50,900
2 JPMorgan (Highbridge Capital Management)[3] $41,100
3 Paulson & Co.[4] $31,000
4 Soros Fund Management[5] $27,000
5 Och-Ziff Capital Management[6] $25,300
6 BlackRock[7] $22,800
7 Angelo Gordon & Co.[8] $22,700
8 The Baupost Group[9] $22,000
9 Farallon Capital Management[10] $20,000
10 King Street Capital Management[11] $19,300


If investors want into this big boys’ game, I like the publicly traded Och-Ziff Capital Management Group (NYSE: OZM[12]), which could land you an 18% yield[13].

  1. DB:
  2. Bridgewater Associates LP:
  3. JPMorgan (Highbridge Capital Management):
  4. Paulson & Co.:
  5. Soros Fund Management:
  6. Och-Ziff Capital Management:
  7. BlackRock:
  8. Angelo Gordon & Co.:
  9. The Baupost Group:
  10. Farallon Capital Management:
  11. King Street Capital Management:
  12. OZM:
  13. could land you an 18% yield:

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