How Large is the Hedge Fund Industry Now?

Last time, we looked at the dramatic rise of the hedge fund industry since 2000. But 2008 was a tough year for hedge funds, to put in mildly. The credit crunch and economic downturn led to a sharp drop in assets under management, due to trading losses and massive redemptions by investors. This forced many managers to sell off assets to meet redemption calls. Many hedge funds put a freeze on redemptions, further shaking investor confidence in the hedge fund model.

According to Hedge Fund Research, a Chicago-based tracking firm, the industry lost a record 18.3% in 2008 and shrank by some $525 billion by December. The overall number of hedge funds may have dropped below 9,000 as well. Hedge funds worldwide now manage somewhere between a conservative $1.4 trillion, as estimated by Hedge Funds Research. Or perhaps somewhere upwards of $2.3 trillion extrapolated by the Cayman Islands Monetary Authority (CIMA), which began tracking the 9,000 funds listed there.
In addition to the dollar losses, the Economist notes that hedge funds’ stature may have suffered a further damage. The prime brokers that provide financing for many hedge funds have forced them to cut back dramatically on the leverage that once made their stellar returns possible.

So far in 2009, there have been signs that the hedge fund industry may be stabilizing. The average hedge fund inched up slightly in the January, compared to losses of 8.6 percent for the broader Standard & Poor’s 500 stock index and a 4.67 percent drop by the average stock mutual fund.

Nevertheless, 2009 will likely be a challenging year for hedge funds as redemptions continue throughout the first half of the year. Moving forward, the hedge fund industry will probably have fewer funds, using far less leverage than in the past, and be forced to charge lower fees.

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February 12, 2009 at 8:09 am

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