Page 1 of 2

Hedge Fund 100A decade ago Bridgewater Associates didn’t really think of itself as a hedge fund firm. The Westport, ­Connecticut, enterprise — which Raymond Dalio founded in 1975 to advise corporate clients on how to manage currency and interest rate risk — began managing money in 1987 when the World Bank hired it to run a $5 million fixed-­income account. Bridgewater launched its Pure Alpha hedge fund during the early 1990s, but the strategy didn’t start to take off with investors until that bullish decade came to an ignominious end. So in 2002, when the editors of ­Institutional Investor were putting together our first ranking of the world’s largest single-­manager hedge fund firms by assets under management, it’s understandable that we missed Bridgewater, despite the fact that it had some $2 billion in Pure Alpha managed accounts.

Today it would be impossible to make that same mistake. With $58.9 billion in hedge fund assets, Bridgewater is the biggest hedge fund firm in the world, leading our tenth annual Hedge Fund 100 ranking.

Bridgewater’s ascent parallels the rise of institutional investor interest in hedge funds during the past decade. Pension funds, foundations, endowments and sovereign wealth funds — driven by a quest for returns and the desire to diversify out of traditional stocks and bonds — have come to invest more and more of their assets in hedge funds. Many have also started to eschew funds of hedge funds, the traditional starting point for institutional investors looking to get into this alternative asset class, preferring to invest directly in a portfolio of hedge fund firms that they construct themselves.

Hedge funds, which started out catering mostly to high-net-worth individuals, family offices and smaller foundations and endowments, are increasingly keen to attract this newer investor base — and their larger investment tickets. For their part many pension funds and other institutions are beginning to look at hedge fund firms along the same lines as they consider traditional asset management firms, targeting those they perceive to be “institutional quality” organizations.

“When it comes to investing directly in hedge funds, institutions seem to take comfort in managers with the size and infrastructure to mitigate reputational risk and with some ability to make tactical asset-­allocation decisions,” says Girish Reddy, co-­founder and managing partner of $6 billion, New York–based fund-of-hedge-funds firm Prisma Capital Partners.

The importance of brand-name recognition is evident in the Hedge Fund 100, where the five largest firms — Bridgewater, J.P. Morgan Asset Management, Man Investments, Paulson & Co. and Brevan Howard Asset Management — managed a staggering $221.6 billion in combined assets when this year began. That’s nearly as much as the $260 billion in total assets that all the firms in the Hedge Fund 100 managed a decade ago in our inaugural ranking. All told this year’s 100 biggest firms managed a total of $1.21 trillion at the start of this year, up 12 percent from the $1.08 trillion in assets that the firms on the 2010 Hedge Fund 100 had.

What remains to be seen as the hedge fund brand wars unfold is whether managers will be able to deliver the kind of consistent, noncorrelated investment returns that investors have come to expect. Size has not always been kind to hedge fund firms. Managers that have risen to the top of the Hedge Fund 100 (think Farallon ­Capital ­Management and ­Goldman Sachs Asset ­Management) have had a tendency to fall down again.

Bridgewater is almost unique among hedge funds in that all of its 300 clients are institutional investors. The average size of their investment: $250 million. Under co-CIOs Dalio and ­Robert Prince, Bridgewater specializes in creating different investment return streams, identifying sources of beta, or market-­driven returns, and alpha, or skill-based returns, then packaging them into strategies that can accommodate its clients’ needs. The firm offered its original alpha product through bond and currency overlays, but as institutions began moving into other asset classes and looking at additional sources of returns, Bridgewater also had strategies that could be considered hedge funds.

“Over time institutional investors became open to a full spectrum of alpha,” says Prince, who joined Bridgewater in 1986. “We could put that alpha on top of any benchmark, and that made us competitive against traditional money managers. We could also take that full spectrum, put it on top of cash, and that became a hedge fund.”

Bridgewater’s strategies performed flawlessly in 2010. The firm’s Pure Alpha hedge fund returned 44.8 percent, while its All Weather non–hedge fund beta product was up 21.16 percent. The combination of high returns and sizable investor inflows helped Bridgewater grow its assets by more than $24 billion in 2010 and overtake J.P. Morgan for the top spot in the Hedge Fund 100.

No. 2–ranked J.P. Morgan saw its hedge fund assets increase by $9.1 billion last year, to $54.2 billion. The bulk of the growth came from Highbridge Capital Management, the New York–based hedge fund firm co-­founded by Glenn Dubin and Henry Swieca in 1992, which J.P. Morgan purchased majority control of in 2004 (the bank has since bought the remaining stake). ­Highbridge had $6.6 billion in assets and was mostly known for convertible arbitrage at the time of J.P. Morgan’s original investment. Today it boasts $26 billion in assets under management and an array of investment strategies, including a new Quantitative Commodities Fund, similar to Bridgewater’s Pure Alpha, which was up 31 percent for 2010.

Dubin, CEO of Highbridge, says he was recently asked if the firm would have been able to grow to its current size without J.P. Morgan’s backing. “I don’t know the answer to that,” he explains. “But without the J.P. Morgan partnership, we would not have been able to broaden our business the way we have, across so many different strategies, liquidity profiles and ­geographies.”

Highbridge continues to build out its hedge fund franchise. Recognizing both the need to offer investors a diversified menu of funds and the rising importance of emerging markets, the firm acquired a stake in Rio de Janeiro–based macro manager Gávea Investimentos in October. In 2003 former Brazilian central banker Arminio Fraga co-­founded Gávea, which had $5.6 billion in hedge fund assets when this year began.

The Highbridge–Gávea deal was overshadowed by Man Investments’ blockbuster purchase of GLG Partners last year (Institutional Investor, March 2011). The two London-­based firms had a combined $40.6 billion in single-­manager hedge fund assets at the start of this year, securing Man’s place at No. 3 on our list. The acquisition of GLG, whose stable of strategies runs from a global macro fund managed by former Goldman Sachs Group proprietary trader Driss Ben-­Brahim to a long-­only sustainable investing fund, gives Man — known for the strength of its marketing and distribution — greater depth and diversity of products to sell.

The majority of assets for GLG, which was founded in 1995 by former Goldman Sachs high-net-worth advisers Noam Gottesman, Pierre Lagrange and Jonathan Green, and Man, whose origins are in the commodities trading business, has come from outside the U.S. But under the combined entity, they are determined to add more U.S. assets.

“The U.S. institutional client market has always been important to us, and never more so than today,” says Lance Donenberg, COO of GLG in the U.S. “We are committed to building on our relationships and reputation with this important group of investors.”

John Paulson, founder of New York–based Paulson & Co., No. 4, with $35.9 billion in assets, has battled accusations that his firm has grown too big, having expanded from $6.4 billion at the start of 2007 to nearly $29 billion just 12 months later — thanks to his hugely successful bet against the subprime mortgage market. Paulson argues that his firm is benefiting from its size and can, in fact, grow still larger. Meanwhile, he has put in place an extensive client service and investor relations operation, including semiannual client meetings — not only for the firm but, starting this year, for each individual strategy.

Although Paulson is never likely to replicate his investment performance from 2007 — his firm’s Credit Opportunities fund was up an astounding 589.7 percent that year — he continues to churn out solid, double-­digit returns. Last year his $8.6 billion Credit ­Opportunities Master Fund was up 19.7 percent, while his $9.8 billion Advantage Plus Master Fund returned 17.6 percent.

Brevan Howard Asset Management, which is no longer the largest London-­based hedge fund manager, drops one place to No. 5 this year despite growing its assets by $5 billion, to $32 billion. Alan Howard and his team of former Credit Suisse First Boston macro fixed-­income proprietary traders founded the firm in 2002 and like Paulson did well during the financial crisis. The firm’s flagship Brevan Howard Master Fund was up 20.4 percent in 2008 and has an annualized return of 13 percent since inception through the end of last year. The fund, however, struggled in 2010, returning just over 1 percent, compared with the 10.3 percent return for the HFRI fund-­weighted composite index.

Single Page    1 | 2