The history of hedge funds can be traced back to the bull market of the 1920s when private partnership funds had wealthy investors to back them and keep them running. After several ups and downs throughout the mid-20th century, the hedge fund industry was revived by the stock market boom of the 1990s.
Hedge funds make money by charging fees to their clients, typically a management fee and a performance fee. The industry average is between 2% and 20%. Apart from simply buying and selling equity, modern hedge funds have expanded to include credit and merger arbitrage, fixed income, quantitative, multi-strategy, distressed securities, and other investment strategies.
By 2008, the total asset under management of the entire hedge fund industry reached $1.93 trillion. By the end of 2017, the industry reported a record $3.2 trillion worth of assets under management. However, that year’s financial crisis and credit crunch erased a large chunk of their AUM’s, which took almost two years to bounce back.
Below is the list of the 14 largest hedge funds in the world ranked by their discretionary asset under management, considering only the funds invested in hedge fund strategies as of June 2021. For reference, here is the AUM of the world’s largest hedge funds in June 2020.
14. AQR Capital Management
Founders: Cliff Asness and three others in 1998
AUM: $26 billion
AQR Capital Management is one of the largest quantitative hedge funds in the world that provides both traditional and alternative investment opportunities for investors. The firm puts a strong emphasis on portfolio diversification and is known to utilize multiple investment styles — value, defensive, carry, and momentum investing.
AQR was instrumental in increasing the marketability of alternative mutual funds after the global financial crisis of 2008. It is chiefly controlled by its three billionaire founders, Cliff Asness, David Kabiller, John Liew, and other principal members.
13. Baupost Group
Seth Klarman (second from left) at Pimlico Race, Baltimore, Maryland
Founders: Seth Klarman and William Poorvu in 1982
AUM: $31 billion
The Baupost Group was founded in 1982 by four partners; William Poorvu, Jordan Baruch, Howard Stevenson, and Issac Auerbach. They were later joined by Seth Klarman, who currently heads the firm serving as the president. As a value investor, Klarman is often dubbed as the “next Warren Buffett.”
Based in Boston, the Baupost Group is known for its risk management practices, and under Seth Klarman’s leadership, it has become the world’s largest hedge fund to employ value investing norms.
Unlike many large hedge funds and asset management firms, Baupost does not take advantage of leverage (borrowed money) while investing in most asset classes with an exception of real estate.
12. Marshall Wace
Founder: Paul Marshall and Ian Wace in 1997
AUM: $33.1 billion
Marshall Wace is a London-based hedge fund with over 25 years of experience in the industry. It was established by Paul Marshall, who previously worked at the biggest investment management firm in Britain, and Ian Wace, who served as the head of equity trading in the Deutsche Bank investment arm with about the U.S. $50 million of seed money.
Marshall Wace practices several investment techniques and strategies and is reasonably flexible on how it commits its investors’ capital. The firm specializes in long-short strategy.
In 2015, private equity giant Kohlberg Kravis Roberts bought a 24.6 percent stake in Marshall Wace, which was increased to 39 percent in November 2019. After the stake acquisition, both firms entered into a strategic partnership focused on co-developing new investment products and strategies.
11. Davidson Kempner Capital Management
Thomas L. Kempner
Headed by: Anthony A. Yoseloff (Executive Managing Member)
AUM: $37.3 billion (2019)
Davidson Kempner Capital Management was initially named M.H. Davidson & Co. when Marvin H. Davidson founded it in 1983. The firm was renamed when Thomas L. Kempner, Jr joined the firm in 1984. He was appointed as Executive Managing Member in 2004.
This New York City-based hedge fund relies on a bottom-up analysis of the market to make investment decisions with the prime focus on distressed securities, merger arbitrage, long/short equity, credit, and convertible bonds arbitrage strategy.
Founder: Kenneth C. Griffin
AUM: $37.6 billion
Known For: Risk Management Practices
The founder and CEO of Citadel LLC established the company in 1990 with the financial backing of his former employer and mentor, Frank Mayer. After a couple of tough years, the firm witnessed a meteoric rise in annual AUM, as well as, in popularity.
But everything changed in late 2008 when the financial crisis hit the hedge fund head-on, just like any other financial company at that time. However, the excessive and unexpected loss in the financial meltdown led the firm to focus on risk management more than ever before.
Citadel has a dedicated risk management center that allows the firm not only to keep a watchful eye on but to run countless stress tests on its assets and investments to avert any possible crisis. The firm’s excessive focus on risk management has played a key in its success after the 2008 crisis so far.
9. Farallon Capital
Founder: Tom Steyer in 1986
AUM: $38 billion
Farallon Capital was established in 1986 by Tom Steyer, who previously worked at investment management and financial services firms, including Hellman & Friedman, Goldman Sachs, and Morgan Stanley. In PE firm Hellman & Friedman, Steyer worked as a risk arbitrage trader, a complex investment strategy that he would later use in his hedge fund.
The firm makes use of various investment strategies to generate profits for its clients. One of those strategies is merger (risk) arbitrage, a type of event-driven investing in which investors take advantage of pricing inefficiencies caused by a major event in a company.
Farallon Capital is also a pioneer of university endowments in the United States. In 1987, a year after establishing his firm, Tom Steyer went back to Yale to pursue the university’s endowment as a client. Initially, Farallon managed Yale’s endowment fund without fees, but that changed after it became a success.
8. Two Sigma Investments
Rachael W. Riley (second from right), director of the Two Sigma Data Clinic | Image Courtesy: Two Sigma Investments
Founder: John Overdeck, David Siegel, and Mark Pickard
AUM: $39.5 billion
Founded in 2001, Two Sigma is the youngest hedge fund on this list. But despite its relatively low experience, the company has managed to outperform other, much older hedge funds through its automated investment/trading strategies, which involve the use of A.I and machine learning.
In 2014, Two Sigma raised about $3.3 billion for their new macro fund, which happens to be the largest of a kind capital raised since the 2008 crisis. The firm, much like tech companies, employs various crowd-sourcing options to develop trading algorithms.
Its unusual name, “Two Sigma” reflects the dichotomy of the mathematical word sigma in which the lower case sigma, σ, represents the volatility in investment returns, while the upper case sigma, Σ, denotes the sum.
7. D.E. Shaw & Co.
Founder: David E. Shaw in 1988
AUM: $39.7 billion
D.E. Shaw is one of the most successful and respected investment management firms in the world. It is widely known for its quantitative investing approach that makes use of complex mathematical and statistical models for investments. However, the firm also makes its investment decisions based on fundamental analysis and human judgment.
Since its early days, D.E. Shaw has focused on recruiting talented mathematicians, programmers, and scientists to develop its own trading algorithms and scientific research.
Two of its former employees, David Siegel and John Overdeck went on to establish their own hedge fund – Two Sigma Investments in 2001. Before creating the Amazon empire, Jeff Bezos also worked in D.E. Shaw for four years.
In 2018, Institutional Investor magazine ranked D.E. Shaw & Co. as the fifth-highest hedge fund earner of all time. It was named hedge fund of the year for multi-strategy long-term performance and macro (more than $10 billion) by HFM, a market intelligence firm for hedge funds, in 2020.
6. The Children’s Investment Management Fund (TCI)
Founder: Chris Hohn in 2003
AUM: $40 billion
The Children’s Investment Management Fund may not sound like a hedge fund at all. However, with about $40 billion in assets under management, it is surely one of the largest hedge funds in the world.
The firm derives its name from an international charitable foundation known as The children’s Investment Fund Foundation or CIFF that focuses on improving children’s lives globally. In the investment world, the firm is more popularly known as TCI fund management or simply TCI.
Like other large hedge funds, TCI engages in long-term investments. It is widely known as an activist hedge fund that often acquires a small stake in a company to compel its management to fulfill their corporate objectives. One of the best examples of TCI’s successful activist campaign is the split-up of the original ABN AMRO, a Dutch bank, in 2007.
TCI faced heavy losses during the 2008 financial crisis. At that time, its AUM stood at about $6 billion. In 2010, the firm recorded an 80 percent loss in profits. However, TCI made huge gains in the following decade with successful investments in relatively risky companies, such as News Corp. and Japan Tobacco.
5. Elliott Management Corporation
Paul Singer, founder and CEO of Elliot Management Corporation at Davos 2011 Image Courtesy: WEF/Flickr
Founder: Paul Singer
AUM: $42 billion
Known For: Investing in distressed securities
Elliot Management Corporation is a New York-based hedge fund specializing in currencies, commodities, equities, and other asset classes. It’s also known for investing in distressed securities, including sovereign or government debt.
The founder and co-CEO of Elliot Management, Paul Singer, is a respected and perhaps one of the most feared money managers in the world. His bold investment strategies such as shareholder activism and investing in near-bankrupt companies have earned him the tag of a “vulture capitalist.”
Paul Singer and his firm get attention from the media on an international stage from time to time. One such incident was in 2002 over Argentina’s sovereign debt default. Then in 2007, Elliot associates coincidentally exposed corruption in the Republic of the Congo while trying to recover its default bank debt.
4. Millennium Management
Founder: Israel Englander
AUM: $52.3 billion
Millennium Management is currently the seventh-largest hedge fund in the world. It was founded by Israel Englander, a U.S.-born investor, with just over $2 million seed money in 1989. The firm enjoyed a rapid rise to prominence after a rough start.
Over the years, Millennium Management has mastered various investment strategies like convertible arbitrage, in which investors take advantage of the price difference between the company’s share price and the convertible bond, and merger arbitrage, which involves buying and selling stocks of two merging companies.
According to Institutional Investor magazine, Isreal Englander was the fifth highest-earning hedge fund manager bagging $975 million in 2017.
3. Renaissance Technologies
Billionaire Investor and mathematician James H. Simons | Image Courtesy: Gert-Martin Greuel
Founder: James Harris Simons
AUM: $58 billion
Renaissance Technologies is another New York-based quantitative hedge fund that was founded in 1982 by James Harris Simons, a renowned mathematician who also served as a code breaker during the Cold War.
The firm excels in the systematic trading environment focusing on ingeniously developed quantitative models or investment algorithms. It is one of the earliest proponents of quantitative trading, a specialized field in which researchers analyze decades of financial data and extract valuable information in order to predict various economic and financial market trends.
The Medallion fund, Renaissance’s flagship offering, has generated annualized returns of about 40% after fees since its launch in 1988. The fund is available only to company employees, however.
2. Man Group
Founder: James Man in 1783
AUM: $76 billion
Man Group plc is a British multinational investment management firm and currently the third-largest hedge fund globally. Founded in 1783, the firm started as a sugar brokerage that later expanded to trade in other commodities such as cocoa and coffee. By the end of the 19th century, the firm diversified into various financial services and products.
Today, the group is composed of five divisions – Man AHL, Man Numeric, Man GLG, Man FRM, and Man GPM – all focusing on different investment approaches and strategies. Most of these divisions have been created over time through acquisitions. It is currently the largest publicly traded hedge fund firm in the world.
Apart from investing, Man Group sponsors a private charitable trust that supports education for disadvantaged individuals. Until 2019, it sponsored Britain’s most coveted literary prize, the Booker Prize.
1. Bridgewater Associates
Ray Dalio, founder and chairman of Bridgewater Associates during its 40th anniversary
Founder: Ray Dalio in 1975
AUM: $105 billion (as of March 2021)
Known For: Risk Parity, Daily Observations
The world’s largest hedge fund, Bridgewater Associates, was founded in 1975 by Ray Dalio in his Manhattan-based apartment. The firm acted as an advisory service during its early years, providing exclusive economic insights to various institutional clients, including McDonald’s.
Throughout the 1980s and 90s, the firm established new benchmarks in specialized areas like global bonds, inflation-indexed bonds, and currency overlay. Bridgewater also pioneered multiple unconventional investment strategies known as Pure Alpha and All-Weather funds.
Focusing on the global macro strategy, the firm places its bets keeping currency exchange rates, gross GDP, inflation, and other factors in mind. In 2018, the firm outperformed S&P 500 and other major benchmark indices and many of its competitors.
Frequently Asked Questions
How do hedge funds make money?
Hedge funds pool money from investors and invest that capital in different asset classes across the market with the intention of generating returns. Historically, hedge funds tend to invest more in public markets than private equity and use complex techniques such as short selling, arbitrage, and derivates.
Hedge funds make money in two ways — Management fees and Performance fees. A management fee is a recurring fee levied by a hedge fund manager to cover operating expenses. It is typically 2% of the fund’s AUM or asset under management.
In addition to management fees, hedge funds also charge performance fees. It is the percentage of profits from investments, usually 20%. While the exact fee structure varies from fund to fund, most of them follow the 2 and 20 rules.
Why is it called a ‘hedge fund’?
In finance, hedging is an investment strategy that allows investors to reduce exposure to the risk associated with their investment, thus making it more secure during market fluctuations. Today, hedge funds use various complex financial instruments to protect their investments, such as forward and futures contracts, swaps, and options.
However, hedge funds got their name from early fund managers who specialized in a single hedging strategy known as the long/short equity model, in which a trader tries to mitigate investment risk by short-selling.
Do hedge funds ever lose money?
The prime objective of hedge funds is to make a profit irrespective of market conditions. Losses and failure are simply unacceptable. However, hedge funds do lose money, incur heavy losses and, in extreme cases, are forced to shut down.
Due to the competitive nature of the business, investment strategies that hedge funds use are usually risky. One of the biggest factors that can lead to hedge fund failure is high leverage. Perhaps the most famous and well-documented hedge fund failure is the collapse of Long-Term Capital Management (LTCM).
LTCM was established in 1994, focusing on arbitrage strategies that take advantage of pricing differences in two or market markets. During only its second year, the hedge fund made annualized returns of 43 percent (after fees). However, exposure to the 1998 Russian Financial crisis through derivatives and high leverage leads the hedge fund to collapse.
Can anyone start a hedge fund?
The underlying risks, legal aspects, and capital requirements of hedge funds make them completely different from ordinary businesses. Typically, hedge funds are started by highly experienced investment managers skilled in complex investment strategies.
According to a report by Grant Thornton, one of the largest accounting firms in the United States, establishing a hedge fund startup in the U.S. costs anywhere between $50,000 and $100,000 with first-year operational up to $150,000. A crucial aspect of starting a hedge fund is legal compliance that requires the right kind of attorney.
The bottom line is that starting a hedge fund requires significantly more money than ordinary business, advanced investment skills, and some luck.