Och-Ziff Capital Management Group LLC, Elliott Management Corp. and Comac Capital LLP pulled in almost a fifth of the money going into the $1.7 trillion hedge- fund industry this year, showing how selective the richest investors have become when allocating assets.
The three funds, which have combined assets of about $49 billion, together attracted $7.6 billion in net new money, according to investors, who asked not to be named because the funds are private. Investors poured $42.3 billion into hedge funds overall in the first nine months of 2010, about 2 percent of total assets, data from Chicago-based Hedge Fund Research Inc. show.
While this is the first year that hedge funds have experienced net deposits since 2007, the amount of money raised as a share of assets is the lowest since 1998, when new capital from investors accounted for 1 percent. Some of the best-known managers, among them Paulson & Co. and D.E. Shaw & Co., have seen net redemptions. The number of startup funds has declined by a quarter, as investors shun managers without a track record.
“The universe of funds that has raised capital is very small,” said Steve Keller, head of financing sales for the Americas at Bank of America Corp. “The market environment is incredibly choppy, and until investors have a better sense of clarity around key issues like the elections, currencies and financial regulation, few will likely be rushing into the market.”
About 75 percent of the $19 billion of net deposits in the industry in the third quarter went to managers overseeing $5 billion or more, according to Chicago-based Hedge Fund Research Inc.
Och-Ziff, the $26 billion firm run by Dan Och, 49, has pulled in a net $2.7 billion, making the New York-based firm one of the most successful money-raisers so far in 2010, according to investors. London-based Comac, with $6 billion, has attracted about $2.5 billion, and New York-based Elliott, with more than $17 billion in assets, has raised about $2.4 billion.
Executives from the firms declined to comment on the fundraising.
The three firms have been helped by the popularity of their strategies. Both Och-Ziff and Elliott are multistrategy funds, and Comac is a macro fund. The two groups, along with event- driven funds, are among the most popular for investors this year, according to Hedge Fund Research.
Macro-fund managers seek to profit from broad economic trends by trading everything from bonds to commodities, while event-driven funds seek to capitalize on company events such as mergers, spinoffs and bankruptcies. These strategies allow managers to invest in a wide array of markets and securities, and clients are betting that flexibility will increase traders’ likelihood of making money at a time when stock prices have been volatile and interest rates globally are low.
In the first four months of the year, stocks, as measured by the Standard & Poor’s 500 Index, climbed 6.4 percent. In the following four months, they dropped 12 percent, and since the end of August, they’ve climbed 13 percent. Interest rates on 10- year government bonds in the U.S. and Europe are under 3 percent and in Japan are less than 1 percent.
For a fund to attract money in this environment, past returns must be strong, and the firm needs to be big enough to absorb large investments from institutions, said Brad Balter, who runs Balter Capital Management LLC in Boston.
Singer’s Track Record
The Comac Global Macro Fund, run by Colm O’Shea, 40, gained 3 percent this year through September. Macro funds, on average, climbed 3.5 percent, according to Hedge Fund Research. In 2008, when macro funds gained 4.8 percent on average, it climbed almost 31 percent.
Other funds attract money because of their longevity and strong returns. Elliott, founded by Paul Singer, 66, in 1977, boasts one of the longest track records in the industry, with an average annual return of around 14.5 percent. The inflows this year are commitments from clients, and not all of the $2.4 billion has been called yet, the investors said.
Och-Ziff has attracted new money even as it underperformed peers. The OZ Master Fund has returned 4.2 percent this year, while multistrategy funds jumped 9.6 percent, on average, through September, according to Hedge Fund Research. Och-Ziff didn’t block redemptions from its funds in 2008, when many other firms limited withdrawals.
Managers that treat their investors well, including a willingness to cut fees for large allocations, tend to be popular, Balter said. On top of that, he said, there are a few must-have funds every year that everyone seems to add to their portfolios.
‘Money Begets Money’
“Money begets money,” said Balter, who farms out money to hedge funds. “If an investor sees other large investors flocking to a fund, then the perception is that his decision to invest is validated.”
Highbridge Capital Management, the New York-based firm owned by JPMorgan Chase & Co., raised about $1.5 billion this year for its hedge funds, which include a multistrategy fund and four smaller single-strategy funds, according to investors. Together, its hedge funds manage about $11 billion.
While institutions tend to put money with the largest managers, some of the biggest funds haven’t been able to attract capital this year.
Assets at New York-based D.E. Shaw have tumbled by 46 percent to $21 billion from their 2008 peak, as investors, angered by the firm’s decision to limit withdrawals in 2008, exited.
Paulson & Co., the $32 billion New York-based firm run by John Paulson, has had moderate redemptions this year because of losses in its flagship fund, according to an investor who asked not to be named because the information is private. Paulson’s Advantage Plus Fund had fallen 11 percent through August before recouping the loss in September.
SAC Capital Advisors LP, the $12 billion firm run by Steven Cohen, attracted a net $500 million this year, according to investors, compared with $1.3 billion in the last six months of 2009. Hedge-fund investors said the drop-off in new assets this year may be because clients are putting less money into equity funds, and are steering away from firms with higher-than-normal fees.
SAC, based in Stamford, Connecticut, charges 3 percent of assets and as much as 50 percent of profits. Most managers demand 2 percent and 20 percent. SAC’s flagship fund returned about 9 percent through September, investors said.
Other hedge-fund firms have closed to new investments to preserve their ability to produce returns, including London- based Brevan Howard Asset Management LLP. The company isn’t taking any more money for its Brevan Howard Master Fund, which now has about $25 billion in assets.
Bridgewater Associates Inc., the Westport, Connecticut- based firm run by Ray Dalio, closed its flagship Pure Alpha Fund II, a macro fund with $35 billion in assets that has climbed about 38 percent so far this year.
Some smaller funds have bulked up. The $6.6 billion Caxton Global Investment Ltd., run by Andrew Law, has pulled in a net $700 million this year as the fund climbed 8.5 percent through Oct. 20, according to investors.
Dan Loeb’s $3.7 billion Third Point LLC pulled in a net $760 million for its flagship event-driven fund, investors said. The fund has climbed more than 21 percent this year. Dallas- based Carlson Capital LP, run by Clint Carlson, raised a net $500 million for its $5.7 billion multistrategy fund, which has jumped 8 percent this year.
Overall, most allocations are coming from current investors who are topping up their holdings as they seek to concentrate their portfolios, according to a monthly report on the hedge- fund industry published by Credit Suisse Group AG.
That makes it difficult for startups. Hedge-fund launches have declined to 340 from 453 in the same period last year, according to data compiled by Bloomberg.
“Smaller hedge funds have put off launching until the environment improves,” said Don Steinbrugge, managing partner of Agecroft Partners LLC, a Richmond, Virginia-based consulting firm that advises hedge funds and investors. “The environment to raise money for launches is very difficult.”
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