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The Morning Brief: Citi’s Bold Prediction for Hedge Fund Growth

A new comprehensive report from Citi Investor Services predicts that the amount of money in traditional hedge funds will surge 81 percent — to $4.81 trillion — by 2018, from $2.63 trillion at the end of 2013. If you include all new sources of capital managed in so-called liquid alternatives, or more retail-oriented hedge fund offerings, Citi predicts the total amount of money managed by the hedge fund industry will double by 2018, to $5.8 trillion (from $2.9 trillion in both traditional and liquid alt strategies today). Altogether, Citi expects that liquid alternatives will manage some $977 billion. This includes the surging 40 Act funds, which are compliant with the laws governing mutual funds, as well as their European counterparts, UCITS (The Undertakings for Collective Investment in Transferable Securities).

“Hedge fund firms are increasingly engaging investors in an advisory capacity to support their clients’ overall portfolios, and expanding into functions beyond their traditional role as just asset managers,” the report states. “Investors are increasingly looking at hedge fund firms more as consultative partners to construct customized portfolios and capture new avenues of uncorrelated returns. In addition, the industry as a whole is beginning to fulfill some of the roles that banks used to traditionally own.”

Citi adds that institutions will account for 74 percent of those assets “as these investors expand their use of hedge funds in risk-aligned portfolios and as they start to rely increasingly on the advisory relationship provided by leading hedge fund managers in support of the institution’s holistic portfolio, direct and co-invest programs.”

A new study from London-based data tracker Preqin underscores how much the largest hedge funds dominate the industry. Hedge fund managers with more than $1 billion in assets under management now collectively control $2.39 trillion, or 90 percent, of the industry’s total assets, which Preqin pegs at $2.66 trillion. However, these larger funds only account for 11 percent of the 4,621 active firms, according to Preqin.

“The largest managers have typically shown consistent performance through many market cycles and demonstrated that they can outperform competitors,” Preqin states in its report. “They have also settled on two approaches — specialization in a core strategy or diversification across several different strategies. Both of these approaches have their own advantages, but the largest fund manager, Bridgewater Associates, has achieved success through its two flagship macro funds.” Alpha recently reported in its 13th annual Hedge Fund 100 ranking that at the start of 2014, the world’s 100 largest hedge fund firms managed $1.51 trillion, up almost 14 percent from early 2013, when they controlled $1.33 trillion. Over the past two years, assets of the top 100 hedge fund firms have surged nearly 25 percent.

Preqin also noted in the same report that there are now 203 institutional investors allocating at least $1 billion apiece to hedge funds, up from 46 from a similar study in May 2013. These firms represent roughly $650 billion in terms of combined capital allocated to hedge funds. This size matters. Preqin also found that 69 percent of hedge fund managers with at least $1 billion have received at least one commitment from an investor allocating at least $1 billion to hedge funds. This compares with just 23 percent of managers with less than $1 billion in assets under management.

London-based Toscafund Asset Management filed a revised 13F with the Securities and Exchange Commission indicating that its U.S. equity holdings as of the end of March were 50 percent lower than it had previously reported on May 14. The hedge fund firm, founded by Tiger Cub Martin Hughes, had $446 million in U.S. equities as of March 31, according to its latest filing. It previously reported owning about $640 million in U.S. equity assets. One big difference: Toscafund slashed the size of its holding in Citigroup to $59 million from $233 million. It also amended the value of its holding in Hartford Financial Services by $20 million and its position in Mitsubishi UFJ Financial Group by about $20 million. Toscafund also tinkered with the value of two other small positions.

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