Executive summary - Udo Bullmann

According to the HFR database 7 , hedge funds managed assets worth $ 1,105 bn in 2005.Since 1990, the average, annual growth rate has been around 25% - again with a tendencytowards acceleration in the recent years.The most common estimates are, that in 2006 hedge funds manage some $1.3 trillion,compared to $400 billions only six years ago. This extremely high growth was realisedthrough a couple of mutually reinforcing factors:• an enduring monetary policy of low interest rates, coupled with• a deep-seated imbalance of world trade flows, which resulted in massive growth ofliquidities seeking attractive yields,• a massive expansion of the investments in HF: In Europe primarily from investorssuch as pension funds and life insurance companiesHow significant is $ 1.3 trillion AUM? By comparison, the total gross domesticexpenditure on R&D of the 25 member states of European Union amounted to around $ 275bn in 2006, i.e. around 1/4-1/5 of the sum of assets under management by hedge funds worldwide 8 . The financial needs of R&D in the coming years will increase sharply in accordancewith the European Union’s Lisbon goals. Therefore the hedge fund industry will be animportant financial factor.This view is confirmed if we relate hedge funds to traditional mutual funds (UCITS). As of2005 traditional mutual funds (UCITS) globally managed $ 17.771 bn 9 with very modest orno growth. This compares to – then – $ $800-1.000 bn AUM of hedge funds growing rapidly(see above). In other words, hedge funds already manage assets amounting to at least 8-11%of the amount of capital managed by traditional mutual funds.The European hedge fund industry is growing fast. To provide a rough picture it could beuseful to refer to some 2004 UBS research:• As of December 2003, 298 hedge fund managers domiciled in Europe were managingaround $ 125 bn, i.e., around 15% of the global assets under management of $ 817 bn.• The growth rate of the European hedge fund industry between 1995 and 2002 wasaround 50%, albeit from a very low base.• The United Kingdom is the dominant location with market share of around 73% basedon AUM and 62% based on number of managers.• Strategies related to equity are dominant. European long/short equity had a marketshare of 36% based on managers and 30% based on AUM.• The largest 10 managers have a 33% market shares.7 HF Research (HFR) is a prominent database managed by HF Research INC. The database stores the data concerning morethan 6,400 HFs worldwide. HFR on a periodic base provides a wide range of HFs’ performance indexes according with aninternal classification along the different investment styles. For more information see www.hedgefundresearch.com.8 Our calculations based on Eurostat. The figures include expenditures on R&D financed by the industry, by governments andfrom abroad.9 Source FEFSI.11