The Hedge Fund Industry Is Bigger (and Has Performed Better) Than You Think

61 Pages Posted: 27 Feb 2020 Last revised: 8 Mar 2021

See all articles by Daniel Barth

Daniel Barth

Board of Governors of the Federal Reserve System

Juha Joenväärä

Aalto University School of Business

Mikko Kauppila

University of Oulu

Russ Wermers

University of Maryland - Robert H. Smith School of Business; European Corporate Governance Institute (ECGI)

Date Written: February 25, 2020

Abstract

Of first-order importance to the study of potential systemic risks in hedge funds is the aggregate size of the industry. The worldwide hedge fund industry has been estimated by regulators and industry experts as having total net assets under management of $2.3-3.7 trillion as of the end of 2016. Using a newly combined database of several hedge fund information vendors, augmented by the first detailed, systematic regulatory collection of data on large hedge funds in the United States, we estimate that the worldwide net assets under management were at least $5.0 trillion in 2016, around 37% larger than the most generous estimate. Gross assets, which represent the balance sheet value of hedge fund assets, exceed $8.3 trillion. We further decompose hedge fund assets by their self-reported strategy and by fund domicile. We also show that the total returns earned by funds that report to the public databases are significantly lower than the returns of funds that report only on regulatory filings, both in aggregate and within nearly every fund strategy. This difference appears to be driven entirely by alpha, rather than by differences in exposures to systematic risk factors. However, net investor flows are considerably higher for funds reporting publicly. Regression results show that previous estimates of the flow-performance relationship are likely biased. Our new, and much larger, estimates of the size of the hedge fund industry should help regulators and prudential authorities to better gauge the systemic risks posed by the industry, and to better evaluate potential data gaps in private funds.

Keywords: hedge funds, net assets, gross assets, strategy, domicile, returns, flows

JEL Classification: G23, G28

Suggested Citation

Barth, Daniel and Joenvaara, Juha and Kauppila, Mikko and Wermers, Russell R., The Hedge Fund Industry Is Bigger (and Has Performed Better) Than You Think (February 25, 2020). OFR WP 20-01, Available at SSRN: https://ssrn.com/abstract=3544181 or http://dx.doi.org/10.2139/ssrn.3544181

Daniel Barth (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Juha Joenvaara

Aalto University School of Business ( email )

Finland

Mikko Kauppila

University of Oulu ( email )

P.O. Box 4600
Oulu FIN-90014, 90570
Finland

Russell R. Wermers

University of Maryland - Robert H. Smith School of Business ( email )

Department of Finance
College Park, MD 20742-1815
United States
301-405-0572 (Phone)
301-405-0359 (Fax)

HOME PAGE: http://www.rhsmith.umd.edu/finance/rwermers/

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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