The following post comes to us from Daniel Edelman of Alternative Investment Solutions; William Fung, Visiting Research Professor at the London Business School and Chairman of Maple Financial Group; and David Hsieh, Professor of Finance at Duke University.
It is virtually impossible to obtain accurate historical data on the entire universe of hedge funds. In our paper, Exploring Uncharted Territories of the Hedge Fund Industry: Empirical Characteristics of Mega Hedge Fund Firms, forthcoming in the Journal of Financial Economics, we identify previously unexplored data sources whereby collecting data on fewer than four hundred large hedge fund management firms that do not participate in major commercial databases adds to the observable industry in assets under management (AUM) terms by as much as 34% in 2001 rising to 65% by the end of 2010. Towards the end of our sample period, these nonreporting firms collectively manage US $862 billion of AUM that is missing from the reported US $1,322 billion of AUM managed by firms in the three major commercial databases combined. We manually collect the names and AUMs of large hedge fund firms that do not participate in commercial databases from surveys published by Institutional Investor and Absolute Return+Alpha magazines, which are good sources of information with almost a decade of continuous history. These previously untapped sources of data provide valuable insight into the capital formation process of the industry over the past decade. While commercial databases have successfully depicted data on the growing trend of hedge fund industry’s AUM, from US $278 billion in 2001 to US $1,322 billion in 2010, there is a more important trend in the capital formation process of the industry that has not been considered in the research literature. We show that over this past decade, the AUM of nonreporting mega hedge fund firms has grown from US $118 billion (2001) to US $863 billion (2010). Results point to a rapid growth of mega hedge fund companies opting for privacy dropping out of the voluntary system of reporting to commercial databases. The empirical evidence confirms that a small group of mega hedge fund firms manages the bulk of the assets in the industry. Taken together, this implies that the assets of the hedge fund industry are concentrated in the hands of a small number of mega management firms with rising opacity as their AUM increases.