How the mighty have risen. Some of them, anyway, as in the enviable instance of Highbridge Capital Management, the New York–based hedge fund firm whose founders, Glenn Dubin and Henry Swieca, shrewdly sold 55 percent of the firm for $1.3 billion to -JPMorgan Chase & Co. almost four years ago in a move -that’s still paying off. The alliance ensures Highbridge of a back-office heft it -didn’t have before and a partner whose very name — especially when the markets go south as they did last year — lends aid and comfort to investors. This helps explain how Highbridge nearly doubled its capital in 2007, to $27.8 billion from $15.7 billion when the year began.
“Highbridge was big before,” says James Bergstrom, a Cayman Islands–based partner with law firm Ogier, whose main clients are hedge funds. “They simply have the backing now of arguably one of the biggest players out there.”
Most of Highbridge’s growth last year was fueled by new money — specifically, new money from institutional investors, say those familiar with the firm. It certainly -didn’t come from investment returns, which were less than sensational. The $14 billion flagship multistrategy Highbridge Capital Corp. fund was up 7.5 percent, beating the Standard & Poor’s 500 index, which had a total return of 5.5 percent last year, but falling well short of the hedge fund’s 24.7 percent return in 2006. Highbridge’s best returns came from some of the firm’s smaller funds. The $2 billion Highbridge Long-Short Equity fund, for instance, was up 40 percent, though the firm’s $1.7 billion statistical arbitrage fund — like many quantitative funds — was hit hard, down 14 percent on the year, and its $700 million event-driven fund fell 13 percent.
It was simple brute capital infusion that fed the beast, as institutional investors made for what they perceived as a safe harbor in tur-bulent markets. -Here’s how the -thinking went: At a hedge fund controlled by a venerable old bank, one could assume that managers -weren’t taking wild--eyed risks, because investment gambits would be sagely tempered by the staid banking culture of the majority partner.
That combination of hedge fund risk and old-school conservatism is what helps Highbridge’s parent, JPMorgan Asset Management, top the chart, for a second year in a row, in Alpha’s 2008 Hedge Fund 100, our sister publication’s seventh annual ranking of the world’s biggest single-manager hedge fund firms. Highbridge, in fact, accounted for 62 percent of -JPMorgan Asset Management’s $44.7 billion in hedge fund assets, up from 47 percent of assets a year -earlier.
The competition is impressive but some distance back. The two second-place firms, Westport, -Connecticut–based Bridgewater Associates and San Francisco–based Farallon Capital Management, each controlled $36 billion in assets as of December 31, 2007, 81 percent of what JPMorgan Asset Management held. For Bridgewater and Farallon, the numbers are an increase over 2006 of almost $5.8 billion and $9.8 billion, respectively, partly from returns but mostly from new money.
Such growth suggests a quantum dynamic at work, and this year’s list sets several records reminiscent of our recently released ranking of the best-paid hedge fund managers (see Alpha, April 2008). The overall numbers behind the 2008 Hedge Fund 100 are generally up and in many cases unprecedented. The ten biggest hedge funds control $324 billion, up 29 percent from 2007 and more than the combined capital of the Hedge Fund 100 firms at the end of 2001. The total assets under management for the 100 firms this year is $1.35 trillion, a 35 percent increase over last year’s total. The Hedge Fund 100’s 75 percent share of all hedge fund assets is a record too, up 6 percentage points over 2007.
Performance didn’t necessarily depend on size. Though some of the biggest Hedge Fund 100 firms logged some of the best returns, some smaller ones did just as well or better. The $7 billion, No. 93–ranked, New York–based Blue Ridge Capital, managed by John Griffin, delivered a 65 percent return. Chris Shumway’s $6.6 billion Greenwich, Connecticut–based Shumway Capital Partners (No. 99) returned 51 percent. Both Griffin and Shumway profited from -classic long-short equity strategies.
Among the most striking showings in this year’s Hedge Fund 100 ranking is by Paulson & Co., the New York–based hedge fund firm that leapfrogs 61 places, from No. 69 to eighth, on the strength of John Paulson’s early arrival at the Subprime Ball. Paulson, the founder, president and senior portfolio manager at the firm, became an overnight legend among hedge fund managers by shorting vast pools of collateralized debt obligations and buying credit default swaps at cut-rate prices as the mortgage bubble burst. Paulson & Co. assets were up fivefold in 2007, to $29 billion.
But perhaps the most jarring jump in the ranking is that of Birmingham, Alabama–based Harbert Management Corp., which practi-cally comes out of nowhere, having barely made the cut last year (No. 94). Harbert rises all the way to No. 16, with $18.1 billion under management, on the strength of Paulson-esque subprime trading by its subsidiary Harbinger Capital Partners, which manages almost all of the um-brella com-pany’s assets. This feat was pulled off -largely by Philip Falcone, who in 2001 founded Harbinger in New York with seed money from Harbert.
Even taking these phenomenal numbers into consideration, however, Highbridge’s growth has been spectacular. Those familiar with the firm attribute its surge-of-capital expansion -partly to its marketing: Highbridge competes better than it used to on product offerings. Before the firm merged with JPMorgan, for example (back when Highbridge was a $7 billion pipsqueak), it offered three funds to investors. Now it has 16.
Other top-ten firms include the No. 4 East Setauket, New York–based Renaissance Technologies Corp., James Simons’ perennial juggernaut, $7.3 billion bigger than it was in the 2007 ranking, despite a capital outflow toward the end of the year. New York–based Och-Ziff Capital Management Group, No. 5, grew in part by going public (see “Welcome to OZ,” page 56). No. 6–ranked New York–based D.E. Shaw Group managed to overcome troubles with its quant strategies last summer; its assets grew 18 percent. Goldman Sachs Asset Management, No. 7 and also based in New York, was hit hard by the -credit crunch and is the only top-ten firm that is managing less money than it did a year -ago.
London-based hedge funds claim six of the top 20 spots — up from four a year ago — a sign that enthusiasm for hedge funds is growing in the U.K.
“What’s going on in the U.K. is that --they’ve -simply been behind the U.S. in investing in these types of products,” says Ogier’s Bergstrom. “Hedge funds are becoming much better known and part of the mainstream. Investors in Europe are investing in funds that five years ago they -wouldn’t have touched. You see exactly the same thing going on in Asia, but a few years behind [Europe].”
Indeed, with the exception of four firms — Tokyo-based Sparx Group Co. (No. 72); Paris-based ADI Gestion (No. 73); UBS’s Alternative and Quantitative Investments (No. 76) in Zurich; and Hamilton, Bermuda–based Orbis Investment Management (No. 91) — the Hedge Fund 100 this year is made up entirely of U.S. and U.K. firms.
The standard-bearer for the U.K. hedge fund boom is London--based Brevan Howard Asset Management, which jumps from No. 22 to No. 11 by increasing its assets from $12.1 billion to $21 billion, largely -— like Highbridge — owing to a huge infusion of institutional capital, say people familiar with the manager. The firm, which, unlike U.S. competitors, is not bound by laws that keep the lid on marketing, says its exposure “is predominantly through global -fixed--income and foreign exchange, employing a combination of -global -macro and -relative--value trading -strategies.”
Almost all of the firm’s assets are in the Brevan Howard Master Fund. The firm made some of its assets -public in March 2007 with a $1.5 billion feeder fund called BH Macro, the first such fund to list on the London Stock Exchange, where it traded in early May of this year at more than £1,400 ($2,723), up 34 percent in one year.
BlueBay Asset Management, another London-based hedge fund firm, also grew notably in a further example of how established hedge funds are drawing enormous amounts of new money. At year’s end, BlueBay, which specializes in -fixed--income credit strategies, handled $16.4 billion in assets, up from $9 billion. It was a -modest showing compared with the funds at the very top, but BlueBay’s growth gives it one of the best improvements in ranking, from No. 44 to No. 20. “It was helped by continued inflows in the face of difficult market conditions,” says a person with knowledge of BlueBay, adding that the new -money -in British hedge funds is fast being supplemented by a cyclical opportunity. “Large strategic--fund investors are looking to raise their exposure to -credit and are anticipating a two- to three-year period of equity--style returns.”
Put another way, the subprime play that worked in 2007 is being manipulated now from a different angle: Managers are putting -money -into discounted debt with the expectation that its underlying -value will be unlocked by the end of the decade.
