Readers of popular media have undoubtedly seen a variety of estimates of the size of the single manager hedge fund industry. With the HFN Administrator Survey, we attempt to present a thorough and thoughtful methodology for estimating the industry accurately which includes adjusting survey AuA to account for potential overestimation and double counting in reported figures.

HFN chooses to use this survey as a basis for our asset flow information because we believe that no other source is as directly in touch with as high a percentage of single manager hedge fund assets than third party administrators. Being in the hedge fund database business, HFN is aware that no more than 40 of the top 100 firms may report to any one database and perhaps the same percentage of the top 200 firms. Additionally, it is rare for these firms to report all, or even a majority of their fund products. This means that using a database as the basis for estimating hedge fund assets is to make assumptions on the vast majority of assets, information which is very difficult to obtain publicly. However through the variety of services offered, HFN estimates that third party administrators service over 98% of all hedge fund assets.

Of the 50+ qualitative factors funds report to HFN, a fund’s administrator is one. If funds are self administered, this fact is noted. To determine an estimate of the percent of hedge fund assets using administrators, we look at the percentage of fund assets reporting to HFN which state whether they use an administrator, or are self administered. To make sure only primary fund assets are used, we stripped out feeder funds and currency classes. The results were that at the end of Q4 2008, only 1.4% of reporting fund assets were completely self-administered. Additionally, if we looked only at large funds, those with greater than $1billion, less than 1% of these fund assets are reported as self administered.

Turning Reported Administered Assets into a Single Manager Hedge Fund Industry Estimate

The results from the 60 administrators responding to the survey were third party administered assets of $2.237 trillion in Q4 2008. Additionally, HFN gathered information from 10 small to medium size administrators which did not report to the survey to cover all meaningful sources of third party administered assets. The result from all 70 administrators was $2.342 trillion in hedge fund assets under administration (AuA) at the end of Q4 2008. We requested that administrators report funds of funds, managed account and other alternative assets separately.

As we become more experienced in surveying administrators, we clearly understand there are limitations to how administrators are able to report AuA. This can produce a certain amount of double counting and overestimation in the reported figures. Through conversations with numerous administrators, we learned these limitations include:

1) Despite best efforts, feeder funds and share classes may not be fully removed
2) Certain private equity assets may be indistinguishable from hedge fund assets
3) Other privately managed pools may be indistinguishable from hedge fund assets
4) Definitions of hedge funds may vary from country to country
5) Most recent figures may not be gathered from all clients at the time of survey response

To best remove these factors and create an estimate for single manager hedge fund assets, HFN made the following adjustments to the reported figures:

1) To the administrators unwilling to separate fund of funds from hedge fund assets, we estimated 66.1% of reported $AuA as hedge fund $AuA to prevent this form of double counting. 

2) HFN estimated that 5% of reported administrator client assets were calculated through November and applied asset flow model estimated December losses and outflows of 8.80% to the 5% of assets.

3) To eliminate the potential for double counting and overestimation in the remaining AuA, HFN reduced the figure by an additional 15%. The reduction percentage was chosen as a result of thorough discussions with administrators on the challenges faced in reporting pure HF assets.

The result of these adjustments is an estimate that single manager hedge fund assets, under all forms of third party administration, at the end of Q4 2008 were $1.905 trillion.

To determine an estimate of total industry assets from this figure we used the HFN database to estimate what percentage of hedge fund assets are self administered. We estimate that 1.4% of industry assets fall outside of all forms of third party administration. To estimate total industry assets at the end of Q4 2008 we increased $1.905 trillion by 1.4% and arrived at $1.932 trillion in single manager hedge fund assets at the end of Q4 2008. This figure is larger than those published by some other industry participants, but we believe those using a database as the basis for estimates are missing a large portion of assets which do not report to any databases and cannot be found publicly and have thus been underestimating the size and influence of the hedge fund industry for years.