The history of hedge funds can be traced back to the bull market of the 1920s when private partnerships funds had wealthy investors to back them and keep them running. After a number of ups and downs throughout the mid-20th century, the hedge fund industry was revived by the stock market boom of the 1990s.
Apart from simply buying and selling of equity, modern hedge funds have expanded to include credit and merger arbitrage, fixed income, quantitative, multi-strategy, distressed securities, and various other investment strategies. 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%.
By 2008, the total asset under management of the entire hedge fund industry reached $1.93 trillion. 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. By the end of the year 2017, the industry reported a record $3.2 trillion worth of assets under management.
Below, we have compiled a list of 12 largest hedge funds in the world along with a brief introduction of their investment strategy and assets under management.
12. Baupost Group
Seth Klarman (second from left) at Pimlico Race, Baltimore, Maryland
Founders: Seth Klarman and William Poorvu
AUM: $28.9 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.
11. Adage Capital Management
Founder: Robert Atchinson and Phillip Gross
AUM: $32 billion
In the world of hedge funds, Adage Capital Management is known for at least two things:
- For managing endowment funds from Ivy League universities such as Harvard, Northwestern and
- For returning investor’s fees in case the fund underperforms a certain universal benchmark (S&P 500).
Adage Capital Management (based in Boston) fetch 20% of investor’s profits as performance fees if they beat the S&P 500 index which is in stark contrast to other traditional hedge funds who charge 18-20% irrespective of their relative market performance. Since its inception in 2001, the firm has refunded its investors only twice in 2002 and 2008.
Founder: Kenneth C. Griffin
AUM: $32 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 an eye but to run a countless stress test 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. Sculptor Capital Management
Robert Shafir | Image Courtesy: Flickr
Sculptor Capital Management (formally Och-Ziff Capital Management) is one of the biggest names in the alternative asset management industry which actively manages various credit funds including dedicated and opportunistic credits, multi-strategy and real estate funds.
The firm also employs institutional credit strategies through which it invests in multiple performing credit class such as junk bonds, leveraged loans and investment-grade credit [bonds with higher credit rating than BBB (S&P)]
Sculptor Capital is headquartered in New York City and has operational offices in Houston, London, Mumbai, Hong Kong, and Beijing.
8. Davidson Kempner Capital Management
Thomas L. Kempner
Headed by: Anthony A. Yoseloff (Executive Managing Member)
AUM: $34 billion (2019)
Davidson Kempner Capital Management was initially named M.H. Davidson & Co. when it was founded by Marvin H. Davidson in 1983. The firm was renamed when Thomas L. Kempner, Jr joined the firm 1984. He as 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.
7. Elliott Management Corporation
Paul Singer, founder and CEO of Elliot Management Corporation at Davos 2011 Image Courtesy: WEF/Flickr
Founder: Paul Singer
AUM: $37.7 billion
Known For: Investing in distressed securities
Elliot Management Corporation is a New York-based hedge fund that specializes in currencies, commodities, and equities along with 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.”
From time-to-time, Paul Singer and his firm get attention from the media at an international stage. 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.
6. Millennium Management
Founder: Israel Englander
AUM: $38.7 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.
5. JP Morgan Asset Management
Chairman and CEO: Jamie Dimon
AUM: $47.7 billion
JP Morgan Chase, at the moment, is one of the ten largest banks in the world and as a “Bulge Bracket” bank, it provides virtually all kinds of financial and banking services to its clients.
The hedge fund arm of the bank facilitates its services either through Highbridge Capital Management or J.P. Morgan Alternative Asset Management (JPAAM) which was established in 1995.
4. 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: $60 billion
Founded in 2001, Two Sigma is the youngest hedge fund in 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 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.
3. AQR Capital Management
Founders: Cliff Asness and three others
AUM: $60 billion
Known For: Alternative investment strategies
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 together.
AQR was instrumental in increasing the marketability of alternative mutual funds after the global financial crises of 2008. It is chiefly controlled by its three billionaire founders Cliff Asness, David Kabiller, John Liew and other principal members.
2. Renaissance Technologies
Billionaire Investor and mathematician James H. Simons | Image Courtesy: Gert-Martin Greuel
Founder: James Harris Simons
AUM: $110 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.
1. Bridgewater Associates
Ray Dalio, founder and chairman of Bridgewater Associates during its 40th anniversary
Founder: Ray Dalio
AUM: $160 billion
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. During its early years, the firm acted as an advisory service providing exclusive economic insights to various institutional clients.
Throughout the 1980s and 90s, it established new benchmarks in specialized areas like global bonds, inflation-indexed bonds, and currency overlay. Bridgewater also pioneered multiple unconventional investment strategies including the 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 not only outperformed S&P 500 and other major benchmark indices but many of its competitors too.