Despite the recent turmoil throughout the financial markets, the hedge fund industry appears to be alive and well, according to the latest calculations showing that the number of funds grew by 14.5% last year, but some say the data may be suspect.
The findings represent the latest indication of the robust size and potential of the ever-expanding industry, now measured at more than 22,000 distinct investment products combining for more than $2 trillion in assets, according to the findings released by PerTrac Financial Solutions LLC, a New York-based developer of asset allocation and investment analysis software.
The study used 11 hedge fund databases to attempt to determine the size of the market. Few funds report to more than two or three databases and only one reports to all 11.
However, as always within the hedge funds space, the findings come with a notable asterisk regarding the real quality of the information being gathered and presented in such a loosely regulated industry.
INCOMPLETE NUMBERS
The underlying message about the quality of industry data isn't lost on the Managed Funds Association, the Washington-based trade association for the hedge funds industry. Representatives from the MFA confirmed that many of the association's members aren't even counted in the market-sizing and performance calculations produced by the databases.
For financial advisers and potential hedge fund investors, the patchwork system of about a dozen primary database firms can serve as an initial research tool and screening mechanism.
Beyond that, critics charge, the databases all fall short for reasons ranging from their incompleteness to the voluntary nature by which fund and manager information is gathered.
While most databases can tout having information from thousands of hedge funds, no database can claim to represent a complete picture of the industry.
According to PerTrac's findings, relatively few hedge funds report to multiple databases, and about 12,000 hedge funds and hedge funds of funds report to just one of the 11 databases in the study.
"That averages out to nearly 1,100 exclusive funds in each database, underscoring the importance of accessing multiple data sources when conducting serious hedge fund screening and analysis," said Meredith Jones, managing director at PerTrac.
FEWER DATABASES?
"Ten years down the road, you'll probably see fewer databases than there are today," said Ryan Tagal, Morningstar's director of alternative investments.
Though consolidation could lead to a few bigger and more profitable databases, that doesn't mean they could offer the kinds of market- sizing data gathered by associations dedicated to areas such as mutual funds and separately managed accounts.
And even if an organization such as the MFA did step up and try to create a single comprehensive database, it would still require the cooperation of an expansive and fragmented industry.
"There's just no way to force a hedge fund manager to report data; the SEC already tried that, and the courts didn't allow it," said Hossein Kazemi, senior adviser to the Chartered Alternative Investment [Analyst] Association in Amherst, Mass. "The investor just has to be aware that the databases give you an incomplete picture."
Without an independent centralized database, Mr. Tagal said, advisers either will have to "subscribe to all of them or just look at the database that covers the segment of the industry you're most interested in."