Raising capital is a complex and expensive undertaking for all parties involved in the alternative investing sphere. Investors expect to be compensated for high risk and illiquidity with above-market returns, whereas, for the managers, the assured revenue fee from managing a large assets under management (AUM) base provides stability.
We analyzed the AUM growth for some of the leading hedge fund and private equity fund managers in the US using their total regulatory AUM as reported on Form ADV filings made between 2012 and 2018¹.
As witnessed in 2015 and early 16, the hedge fund industry experienced its biggest plunge since the economic crisis, losing about $95 billion in assets², owing to high volatility in the financial markets due to uncertainty around China's economy and the Federal Reserve policy. This is evident in the Hedge Fund Weighted Composite Index which fell significantly by 6.7% (May 2015 - February 2016).
This negative performance affected the assets under management of some of the leading hedge fund managers.
Below is a table listing the total regulatory AUM of hedge fund managers, and its growth over time followed by the hedge fund gross asset value (GAV) as a percentage of total AUM.
AQR and Bridgewater are the top 2 firms given their latest GAV. In terms of CAGR, AQR again emerged on top with 22%, followed by Two Sigma (18%). However, it must be noted that a large part of AQR and Two Sigma's growth can be accredited to launching public funds (Hedge Fund GAV only accounts for 39% & 62% of AUM, respectively).
We can see that most hedge funds experienced an upswing in AUM till 2015, which either flattened or fell as we moved into 2016, with Baupost Group (-15%), Adage (-6%) and Bridgewater (-3%) experiencing the highest loss in value over these two years.
The hedge fund industry began to stabilize in 2017, ending on a high note with a net inflow of approximately $10 billion³ and continuing that trend into 2018. HFRI's Composite Index also which rose 8.7% compared to 5.4% in 20164.
On the whole, private equity funds see more positive press compared to hedge funds and for good reason, due to their recent market beating performance especially by their top-tier funds5.
Here are the assets under management for the top private equity fund managers.
Vista Equity Partners went from managing $6.4 billion in 2013 to nearly $36 billion in 2018 - that's a 33% CAGR. Overall, the Carlyle Group led the pack with $124 billion assets under managemen. Kohlberg Kravis Roberts (KKR) also saw a big surge in their AUM in 2018, going from $77 billion the year prior to $119 billion and recording the second highest CAGR.
The nature of the business and longer-term commitment of capital makes private equity funds less prone to immediate performance-linked repercussions.
The performance expectation for 2018 appears to be positive as well. Given this, Barclays predicts close to 35% net increase in asset allocation for both, hedge funds and private equity funds.
1 The data is from Q1 filings for firms where available. If not, the next filing was chosen.
2 https://money.cnn.com/2015/10/27/investing/hedge-fund-performance/index.html
3 https://www.investmentbank.barclays.com/our-insights/go-with-the-flows-hf-outlook.html
4 https://www.morganstanley.com/ideas/hedge-funds-2018