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U.K.’s Largest Hedge Funds Get Bigger With 82% of Assets

About $470 billion of assets are managed by hedge funds in the U.K., and 450 of the firms are registered with the regulator. Photographer: Matthew Lloyd/Bloomberg
About $470 billion of assets are managed by hedge funds in the U.K., and 450 of the firms are registered with the regulator. Photographer: Matthew Lloyd/Bloomberg

March 24 (Bloomberg) -- The U.K.’s largest hedge funds are getting even bigger, with 20 firms controlling 82 percent of the assets under management, the country’s markets regulator said.

The growing size of hedge funds creates a need for better oversight of the industry, the Financial Conduct Authority said after conducting a survey of the nation’s biggest funds.

“With nearly 20 percent of global assets under management here, it is important that people have confidence in how we regulate this market,” Clive Adamson, the FCA’s head of supervision, said. “The challenge from us to the industry is to ensure that it operates to the highest standards of integrity.”

While global hedge fund assets rose 17 percent in 2013 to a record $2.63 trillion, the industry is becoming increasingly polarized as smaller firms struggle to raise money. Last year, 904 hedge funds shut down, the highest total since 2009, according to Chicago-based Hedge Fund Research Inc.

About $470 billion of assets are managed by hedge funds in the U.K., and 450 of the firms are registered with the regulator. The FCA survey includes data from 49 firms, which manage $481 billion globally, and from 106 funds, with assets of $345 billion. None of them were identified in the report.

Hedge funds also increased their leverage, which is the use of borrowed money to maximize bets and profits. The measure rose to about 64 times firms’ assets in September from 54 times their assets in March of last year, the FCA said.

OTC Derivatives

The increase in leverage came mostly from interest-rate derivative positions, the FCA said. Hedge funds increasingly traded more derivatives over-the-counter rather than using an exchange. As of September, funds traded OTC derivatives 63 percent of the time, up from 53 percent in 2012 and 46 percent in 2011.

Leverage isn’t as high as the FCA indicates, said Jack Inglis, chief executive officer of the Alternative Investment Management Association Ltd., a lobby for the U.K. hedge fund industry.

“These numbers do not represent the economic exposure or actual risk incurred by hedge funds because they do not take account of netting and offsetting positions in the portfolio,” Inglis said. “Financial leverage, expressed in terms of borrowing and repo financing, is much lower, somewhere around 2.3 times the net asset value of the funds surveyed.”

Hedge funds and private-equity firms came under scrutiny from lawmakers who said they were partly to blame for the economic turmoil that followed the collapse of Lehman Brothers Holdings Inc. in 2008.

To contact the reporters on this story: Lindsay Fortado in London at lfortado@bloomberg.net; Jesse Westbrook in London at jwestbrook1@bloomberg.net

To contact the editors responsible for this story: Anthony Aarons at aaarons@bloomberg.net Peter Chapman

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