If you look at the flows for the full year, even though there was considerable capital flow into the largest firms, which we generally say is north of $5 billion in assets under management, actually the smallest funds in the industry, funds less than $100 million, actually received the most of the inflows for the year. Hello, everyone. Welcome to another edition of Other People's Money. I am joined today by Ken Hines, the president
of HFR. They're the leading database for hedge funds, as well as many other things. Today, we're going to talk about the hedge fund industry more broadly, get a better understanding of what the industry actually is, because people talk about hedge funds all the time, but it is such a huge space with so much diversity and variation. If you're not tracking it every day, like the people at HFR, you're probably only talking about a small subset of the industry. So Ken, thank you so much for joining me today. Yeah, absolutely.
Thanks for having us. Great chance to come on and talk a little bit about what we do. HFR has been around a long time, especially in the hedge fund industry. We've been around since 1993, long before I was even here. And you mentioned earlier the leading data. We really think of it the leading index and data provider for the overall hedge fund industry. The HFR is essentially the S&P 500 for the hedge fund industry. So for the
people, investors all over the world, investors, fund managers, service providers, banks, traditional asset managers, and of course, hedge funds and funder funds that are looking for a benchmark for their performance
We are, you know, we receive information from the largest group of funds. We use that to create our indices, which are published some daily, some monthly, and that are used all around the world to benchmark performance. And at the same time, we also make available
information, both research and individual fund information for people that want to invest in the industry or do due diligence on the industry or look at the funds in the industry. We have over 6,000 funds in the database that you can look through, sort, filter, create all kinds of analysis that helps you decide
If you want to invest in a certain fund or you're thinking about changing fund, all these things are possible to do. Now, what qualifies as a hedge fund? Because it's one of those terms that doesn't quite have an exact definition. Can you be long only? Are USITS funds included? Like what makes its way actually into the database to be qualified as a hedge fund in your eyes? Yeah, that's a great question because, you know,
We think a hedge fund is a private investment vehicle generally exempted from registration for the SEC. Now, you mentioned a couple of other things. So generally, funds are going to be a 3C1 or a 3C7 vehicle, but you can be others as well. But those are the most common structures where it's essentially...
and investors are limited partners, and the fund manager is the general partner, and that's the way the fund operates. You can have an onshore hedge fund, you can have an offshore hedge fund, onshore for US investors, offshore outside of the US. There's other, I mean, generally hedge funds are long and short. I see in almost all cases, they're long and short. Some are very fundamental in nature, some are very quantitative in nature,
Some have very high amount of exposure in terms of net exposure. Some have almost no net exposure or they have net short exposure. So it really ranges really broadly. What I would always encourage investors to do is to familiarize themselves with the strategy descriptions and classifications that we have on our website. And you could include a link in at the end of this to kind of direct people to that. That's really the most authoritative way
description of fund strategies are out there. There's four main sub strategies. There's around 30 sub strategies that each that falls under each of those four. So you've got equity hedge, event driven macro and relative value arbitrage. And then each of those has sub
six to eight sub-strategies underneath it. And so when you look at the database, you're looking at funds that have been categorized into all of these boxes, what we call these bases of indexation. And then we
run methodologies and produce indices for all of these. And so the last question you said, can the hedge funds be usage? Can it be long only? There are usage funds that are alternative usage, and there certainly are a much larger group of usage funds that are not considered hedge funds. So
And similar to what you would see as a US Horty Act mutual fund, there can be short, but they're generally long only. And so usage funds, there is alternative usage that are considered hedge funds, and then there's a larger pool of usage funds that are not. And then can they be long only?
The answer is yes. Some strategies are definitely, some strategies are more conducive to long only if it's an equity strategy, and it's long only, I would generally consider that not a hedge fund. But in strategies like activists or distress funds,
It is common to have a hedge fund which is not short or that is not short all the time. Sometimes it's short some of the time and then not the rest of the time. Generally, they're long and short. There are, with some exception, people that can be long-only and still be operating a hedge fund.
Okay, and you guys are actually going in and taking a look at the strategies. It's not like you're just pulling all the Form Ds automatically, and if you select that you're a 3C1 or a 3C7, you're automatically getting added to the index. Is there some amount of AUM that you have to have to make it into the index? What is it that makes somebody qualify to get added to a particular... Yeah, we don't take the information from anywhere. The manager is provided to us. And so when we were creating...
a profile of a fund that somebody is going to see in the database or they subscribe to the indices, all that information is received directly from the manager. So that's the way that we handle it. We're not taking it from anywhere.
And so you talk about going to your website and seeing these classifications. So many funds, especially funds that kind of pride themselves on having a go anywhere, maybe more of an old school hedge fund mandate of, we're going to go wherever the alpha is. How should they think about navigating these classifications? Because obviously, if you're a merger ARB fund, that's what you do. Through and through, it's very easy to go in and classify yourself and you're going to show up in all of the right indexes.
And if an allocator is looking to add merger arb to their portfolio, it's going to be very easy for them to find you. But if you're somebody who does merger arb when you think it's attractive and you do something else when it may be less attractive, how should you navigate that?
filling out these types of this type of information to get properly classified in a place like HFR. Yeah, our team works with managers all the time to help them classify themselves correctly and to understand those. And for people that the sub strategy is
The sub-strategy composition can vary from time to time. We have a number of different multi-strategy categorizations. Actually, within each of the four main strategies, we have a multi-strategy and that's where people like you to use your merger arm example. If you're of an event driven fund and sometimes you're in merger arm and sometimes you're not, you're in special situations or stressed and it can change as market opportunities change.
We have event-driven multi-strategy. It's a perfect classification for that. And a fifth one that's kind of interesting, a little bit of a newer one, but very timely in the market now, is we actually have an index of multi-manager hot shots, which is something that we brought out back in the third quarter of last year. And it really sort of captures
I guess the way the industry has evolved. And to your earlier comment, the industry has evolved away from the black box mentality that it had sort of in the 80s or the early 90s where investors have no idea what the fund was doing. You just send in your money and think that it's going to make 40% a year and you don't know what they're doing, whatever, how much leverage, who's in charge of it.
If that was ever the case, it was a long time ago. Now the industry is very well understood in terms of what the strategy is and risk limitations and leverage and things like this. And all that information is very well, I guess, appreciated by investors. So I think that that's really the way to talk about how the industry has evolved away from
a black box in, you know, in, in situation where you're investing in a manifold fund or,
a venture fund, you really haven't a very good idea of who the portfolio managers and what the strategy is and what kind of instruments you're going to be investing in, what kind of leverage there is. These are all things that investors, they use our data product and engagement with the managers to really have a good understanding of these things. You mentioned the rollout of the Podshop index as of last year. How many funds are included in that index and how...
How much demand did you have for this? I mean, it's a topic that seems to be unending in the industry right now is discussion of these large multi-manager platforms. There's a lot of interest in it for sure. I think we looked at, it was less than 50, but somewhere, I think we said three dozen or so
managers that we were looking at, some of them historically, currently. We looked at an even bigger pool of funds to really decide when we wanted to capture how this industry has evolved, how this pod shop has evolved over the last, say, five years or things like this. We really wanted to capture this sense where it's not just a multi-strategy where you have three or four different
of our sub strategies within a single fund wrapper or something like that. But the really decentralized nature of these firms where
It's not, you know, three or four or five strategies, but, you know, up to two or 300 trading teams remotely located that may have very little to no contact with each other. They may be located all throughout the world and they just essentially feed their positions. Capital gets deployed, risk capital gets deployed, you know,
Risk management gets applied at the strategy level and individual pods can be dialed up or down depending on the opportunity. And that's really the way these work. And pods can be added to the fund or remodeled.
It's a very sort of decentralized, very specialized, and I think it's a very effective way for investors to get exposure to a wide range of trades through a very specialized team's approach.
You say you started out with a lot of funds. You came down to about three dozen. I mean, what's sort of like on the line? We don't have to name any specific funds, but what are the types of things that you see at some places that make them multi-manager, pod shop-like, but just didn't quite cross over the threshold to make it into this index that you think is more representative of the true pod shop strategy? Yeah, we had a team of people, including myself and others,
that sort of went through the funds to really get the, you know, everything that I talked about, about how you've got remotely located, autonomous teams, very independent, and that they would
operate through this centralized structure where risk capital is deployed. And then there's obviously a front office of how you can invest into the fund and get exposure to these. Like I said, in some cases, it's dozens of pods within a single fund and upwards of a few hundred in cases. And so that's really what we took a very stringent approach because we wanted this index to really capture what it means to be multi-manager pod shop, not just
as if it's the flavor, the moment, that everyone wants to call themselves that. We really wanted people to demonstrate that they truly are
emulating, this is really what their strategy is. And that was the biggest, probably the most defining component of what we were doing. I think everybody's familiar with the big brand names and the tens of billions of dollars that they manage. What about at the small end? What was the smallest pod shop that made it into the index? People out there running that site type of strategy.
You know, it's a good question. There certainly is guys in the bolds bracket that a lot of names, the household names that people are familiar with was a decent number. You know, and the funny thing is that when we launched the index, we had some people bring us ones that were that were perfect numbers.
examples of what we were looking for. And until we launched the index, they said, oh, you know, yeah, that's that. We definitely want to be in that. So people were bringing us stuff. And so, yeah, I mean, I don't there probably wasn't anything. I think the cutoff we used in terms of assets and we iterated this a number of times. I think it was 500 million. There may have been a few that were lower than that. I can't remember if we if we picked a lower number.
cutoff threshold, but really you basically had from, you know, 500 or 250 all the way up to the, you know, billions, tens of billions of dollars. So it's a really exciting area and one that, you know, like I said, to your question, how much interest do we have? Well, a lot. And so we're very excited to be able to bring this forward. And we've got some exciting new innovations happening
in our indices that we're going to be bringing out in 2025. I say the first quarter, but it's the first quarter and the second quarter. What are the new things that are coming out for you in terms of indices? And I'll broaden that question to, what are the other big trends that clients are wanting you to quantify and capture for them? I think probably the biggest one that I would say in terms of the trends that people want to see captured is really the growth
in the way the industry is growing and also, I guess, receiving a lot of growth from the crypto space. Because as that's growing and booming, I guess you could say, you see really two type of entrants. You see new funds trading only crypto and just doing that. And like I said, there's some that are
arbitraging these, they're doing types of jurisdiction arbitrage, or they're arbitraging between different coins, taking a long position one rather than others. So you're seeing new funds launch, specialized folks entirely on this. And then you're seeing, to come back to what we were saying earlier,
the larger funds that are adding crypto to an already established $10 billion, $5 billion fund, maybe as a new team, maybe as a new strategy. But you're basically seeing the growth coming in from both sides. And that's what's real exciting about what we're doing.
Now, with crypto, this is something that I've always wondered because there are those strategies like you're talking about, or maybe it's jurisdictional arbitrage where you're literally buying and selling the same thing in a different place and you're making the spread. And I don't think anybody would disagree that that's a hedge fund strategy or a hedge fund-like strategy. But what about just like buying baskets of coins and saying-
It's a long-only vehicle with exposure to crypto. It might be wrapped in a 3C1 or a 3C7 wrapper. Is that qualifying as a crypto hedge fund? Yeah, it's a good question because it's probably an important clarification. So we run to...
crypto indices, crypto and blockchain indices that you see published on the website. Those are not a sub-strategy in the same way I was referring to like a venture and a merger. They don't roll up into the hedge fund index. They are a separate
index. And part of the reason it's a separate index is what you just described, because you've got a combination. It's a very new area where there's a lot of disruption going on. And you do have a combination of what you would call sort of categorically true hedge funds and what you'd call other sort of investment pools that might be long-only, that might not be structured at the recent, might not even be considered a hedge fund, but they could, because it's not
part of the HFRI, that index can include any type of pooled vehicle that is focused exclusively on these, that's focused exclusively on the crypto area. And how big are these funds? I think that's something that's always interesting. Obviously, in the hedge fund space, you can manage
tens of billions of dollars. But crypto is a newer ecosystem and the liquidity, although growing rapidly, it seems almost daily, is just not quite the same, especially to be able to get when so many of the participants are so just like directionally biased long, it can be hard to
to get short exposure, for instance. So if you're trying to run a strategy that isn't just long, the capacity constraints can pop up pretty quickly. It can vary, but generally, I think you're right, smaller. I mean, you can see funds that you don't see the same
dispersion of size that you see with hedge funds where you can have people that are, you know, 10 and 20 billion dollars. But, you know, a lot of the liquidity providing that's being done in the crypto space can be done by
hedge funds or other bull vehicles. And it can be done by prop trading firms as well or market making in this area very aggressively. And so there can be considerable capital from, and again, these are part of the index because they're not managing any type of third party capital. They're just managing capital
proprietary book. But a lot of the market making, a lot of the positions can be held in those kind of vehicles as well. What about jurisdictional? How much of the crypto hedge fund space is offshore versus onshore here in the US? I feel like almost every fund manager, whether you're
you know, set up in Europe or you're set up in the Middle East or the United States, you want to have a U.S. vehicle so you can have access to U.S. markets. But I feel like crypto might be slightly different in terms of where they're raising their capital from and where they're setting up shop. Yeah, I think it's really both. And you can't underestimate, yeah, there's a lot of crypto excitement. There's a lot of investors in the U.S.,
but there's a lot as well. If you look across emerging markets, even throughout emerging Asia especially, you see U.S. investors sort of understand this, but those markets, you look at places like South Korea and things like this and Japan, very advanced appreciation of
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to get your 10% discount. Now let's get back to the interview. Let's broaden it a little bit to hedge funds in general. Assets under management, with very few years of exception, seem to grow, but a lot of that growth is from returns versus flows. So I want to talk about the growth of the industry and dive a little bit down into how much of this is coming from capital compounding over time,
How much of it is inflows? And when it is inflows, where is that coming from? Yeah, it's really both. The split can vary from year to year. I mean, last year was a good year. You had the industry overall gaining 10%. But the amount that can come from performance also can vary by year.
whether or not the larger funds are outperforming the smaller, because you can imagine a scenario where a large fund is up 20%, when the industry is up 10%, it's going to see a significant asset growth associated with that. And obviously the opposite can be true as well. And so it's both. Obviously you have, we've seen years, we've seen a couple of good years of growth since 2022, which was a difficult year.
Difficult year for the market overall. And it really, generally, the growth in the industry seems to mirror
what you're seeing in terms of investor risk appetite, because when you see more risk on behavior, greater risk appetite, that's when you see stronger performance and asset growth. And when you see in periods like where we do have some volatility and dislocation, like we saw
March, April of 2020 and throughout the first half of 2022, there's a lot of concern about inflation and the impacts of inflation. You see investors pull back. So that's really what our data shows. We're very excited about the growth that we have seen. As you know, industry capital grew to $4.5 trillion in 2024. That was a record. That was the fifth strikeout.
straight quarterly record. The flows, so the largest area of asset growth was in our directional strategies, equity hedge, which itself is $1.3 trillion of capital. So that's the largest strategy area. And event driven is actually not very far behind that. In flows to relative value and fixed income based relative value. I always preface that with fixed income based so people understand that's really bond arbitraging,
type of multi-strategies. And then event-driven, we talked about that earlier and the different multi-strategies. There's a tremendous amount of enthusiasm for event-driven with all of the changes that are coming through with the new administration in the US. There's a real sense that
that first half of the year, and we see changes even today with market reacting to tariffs. There's a lot of policy changes coming down. I mean, you can't even, that's understating it to say that there's a lot. And as those new, as the industries evolve to these new policies, it's going to make transactions feasible that weren't before. And it's going to shake up
the landscape of industries and redefine the lines of competition, the Venture is going to be an exciting place to be. Yeah. Now, for those net asset flows I see, last year was about $10.5 billion.
But prior to that, you had seen two down years. There was another up year in 2021 of about $15 billion and some red years. I mean, it seems like basically since 2010, since we got out of the GFC, this is all eyeballing here, but moderate inflows since that period. Now, those outflows, is that just when you do see that, how much is that?
pulling capital and how much of it is return of capital. It's a huge trend that we're seeing with those large funds where they're returning profits. So the fund might have a great year and then return $6 billion, and that's money that's going to come out. Maybe it gets reallocated, but it takes a while for that to make its way back into the industry overall. It's an interesting trend, and it kind of happens at year ends, especially after strong years, where you see...
I'd say the return of capital trend is probably, it gets a lot of publicity. It's probably isolated to a relatively small handful because most funds are eager to continue to grow and they want to continue to have investors allocating their funds until they reach capacity in their strategy. And when you get to the point where you feel like you have the right, the optimal amount of capital deployed in the strategy,
to generate the return that you want and you feel that additional capital is going to
I guess, the performance going forward. If you want to target making 20% in a certain position or a trade or 25%, but you feel like if you keep deploying capital into it, you're going to bring that down. And this is a perfect example. We talked about merger up earlier. This is a very common thinking that if you keep deploying capital into it, the spread is going to contract just as you keep deploying more capital to it. And it's also...
increased concentration risks. So you definitely see a return of capital. Like I said earlier, it is concentrated in a handful of funds. I think a lot of times they'll offer the investor the chance to allocate to a different vehicle or they'll return capital with the idea that if the fund reopens or if they open another product that's interesting to the investor. But it's really kind of
a way for the manager to keep the optimal amount of capital in the strategy to generate the target return for investors. And now this is something that a lot of commentary has been made about, and perhaps it is the coping of people who are on the wrong end of this trend.
But the idea that as more and more capital piles into strategies, particularly pod shops, that the returns of those strategies are not as good moving forward. I mean, you have tremendous data on capital flowing into strategies and then the returns thereafter. Is that something that bears out in the HFR data that if there is a strategy that does well, say for five years, the next five years, they tend to have a lot of capital flow in. What does the returns look like?
after those sorts of trends play out? You know, people will say that commonly, but the industry's big, but financial markets are... I mean, if you think about the magnitude of the global capital markets, as big as it is, it still has tremendous amount that it could grow. I mean, think about it. What's the latest...
total assets of BlackRock is what, $11 trillion or something like that? It's a very large number. Think of it, the industry is less than half the size of one large firm, BlackRock. And obviously other large traditional asset managers are in the near $10 billion if you look. So if you think about it, yeah, it's really large, a lot of capital, $4.5 trillion, but
so much bigger and still not reach the point where in an aggregate sense can continue to generate points. I don't, I don't think we're seeing that individually funds might feel that they don't want to, but I think collectively in an aggregate, the industry can continue to grow without seeing a, a,
without seeing an impact on performance and expectations of performance going forward. You mentioned crypto as one area in particular, but outside of that, is there any area where fund formation seems to be the highest? Not talking about AUM because that's its own thing, but generally the number of funds might be more strategy, people saying this is an opportunity in the market, whether they're able to convince investors of that and taking AUM as another question altogether.
The question you're asking is, where's the growth in new launches? Not capital growth for existing funds, but newly launched funds. And it's really across all the four strategies. I mean, we have reports every quarter that we put out on new launches and new launches by strategy. I know that fixing base strategies were strong in 2024, but really across the board, there wasn't one area that
we weren't seeing new launch activities. And new launches can be relatively small. I mean, people, you hear a lot about the 10 and $20 billion funds. There's a lot of funds that are launching with 10 million, 20 million, friends and family capital, less than 50 million that are launching and that have an innovative new strategy and they want to get it out there and they want to grow it. And
and they want to be aggressive, sometimes people launch with a billion dollars. Usually if they come with a very, you know, if they have a good Rolodex and a good capital backing, you can launch with 500 million, you can launch with a billion, but, you know, a lot of people launch with below 50 million. So it really ranges. Interestingly enough, one of the, you know, it sort of touches on the earlier question as well, but if you look at the flows,
for the full year and split them by the fund sizes of that. Actually, it's kind of a funny result, not funny, but interesting result that in 2024, even though there was considerable capital flow into the largest firms, which we generally say is north of $5 billion in assets under management firm level, but
because there's some volatility there and redemption at that level can be, you know, the capital flows can change. Actually, the smallest funds in the industry funds less than $100 million collectively, which obviously numerically there's a lot more, but you have a lot less ability to give them, you know, $20 million or $50 million because you can't be that large of a percent of the assets. In aggregate, those are actually,
received the most of the inflows for the year, less than $100 million. So it's kind of an interesting result, but it just shows you that funds are able to grow. And obviously, numerically, there's a lot of funds in that group, a lot fewer than in the north of $5 billion. But
That's what the data shows. No, that is tremendously surprising and probably wonderful news to many of the listeners of this podcast. Don't be discouraged. Yeah, don't be discouraged, guys. No, I'm looking at the slide here from your media deck that shows as of the end of Q4 2024, 41.45% of the firms out there are in that under 100 million. So for them to take
For them to take in more than half of the capital, to take in more than $5 billion is definitely punching above their weight. But to your point, right next to that is another pie chart that I'm looking at that says over $5 billion, they control almost well over 72% of the capital. So they still control the majority of the AUM, but at least in terms of inflows last year, the little guys...
seem to take in the most? And that reality is almost self-referential. Obviously, the largest funds are the largest. They control the most capital because they're the largest. How has the size at launch changed over time?
Have launches just been stepping up? Are people launching with the same amount of money that they would have launched with five years ago, 10 years ago? Obviously, the threshold for SEC registration is $150 million. There are a lot of people in the small fund space who comment on the increased cost that comes with keeping up with SEC registration.
is higher than it's ever been. The cost of lawyers has gone up, the cost of fund administrators has gone up, but that threshold has stayed the same even though $150 million is not what it was 10 years ago. Is that bearing out in fund launches? Are people still striking out on their own with hope in their eyes at the same levels that they were maybe five, 10 years ago?
It's a good question because it can vary. When people have a better risk tolerance, there's a greater inclination to invest in, you know, they invest in a smaller fund.
You want an innovative strategy, an aggressive strategy, an approach that you're not getting with a lot of other competition. And crypto is a perfect example that people are very interested in hearing about strategies and approaches in this space. And so I think an answer to your question, though, is it can vary when risk tolerance is very high.
average launches ticks up and you're much more inclined to see $100 million, $200 million, $500 million, $1 billion launches. And when risk tolerance falls, that's when the average asset, nobody's raising a billion dollars on day one. It's going to be $500, it's going to be $200, $300, whatever, $100.
And so it's going to vary from cycle to cycle. There's not one trend that I can say it's always higher, always lower. It changes up all the time.
Well, I will say that one trend that does seem to be pretty steady is the number of funds. So, you know, we kind of peaked out in 2014 at a little over 10,000 funds. And really since 2020, you've seen sort of 9,100, maybe 9,200 as the handle there. So with all these launches, there are closures too. Yeah.
So on the fund closure side, is it performance? Is it failure to gather assets, combination of the both? And what is the closure cycle like? When funds close, it's generally because of poor performance, underperforming, and obviously investors will be patient.
for a while, but if it reaches the point where it's not possible to, investors want to redeem the capital and invest in something else, another fund or something else, then oftentimes the manager has no choice. And it's a tough position. And I'm sure obviously everybody launches a fund, wants to see it be successful and raise hundreds of millions and billions of dollars. That's the goal. That's the objective for everyone. And
Not every fund large is going to achieve that goal, but obviously everyone sets out to achieve it, and that's
You know, that's, you know, we just track and see what we can say about those. We mentioned them briefly. We haven't focused too much on what about the fund-to-funds industry? You know, back in the great financial crisis, the ratio of fund-to-funds to actual individual fund managers had never been higher. That has sort of steadily been declining with the number of fund-to-funds kind of leveling off more recently. Right.
How has the fund-to-funds industry evolved post-GFC and...
And what are the trends there? I've had people on the program who've talked about the fund of funds increasingly are actually starting to look more like the multi-managers with them having managed accounts and having central risk control and doing SMAs with single managers rather than investing in, you know, commingled vehicles themselves. First part of the question first, definitely think that the industry peaked in the 2005, 2006, early 2007 period
You saw the commingled fund of funds in terms of the number of vehicles out there being marketed really peak and then begin to decline. That decline happened pretty rapidly for a couple of years. And I think, as you point out, it's kind of leveled off now where
Firms that are very committed to the business model and represent their value proposition effectively have been able to endure the challenging market environment. But you've also seen evolution of the model and you've seen greater growth.
Use of different techniques. You know, there's some there's some fund of funds that that do more centralized risk management. They do some layering that you see some trends like, you know, top position building and monitoring and other sort of portfolio management techniques.
being applied at the fund-to-funds level. You see some use of managed accounts that's better in some cases. They use transparency to tweak positions, things like this. So there has been growth. Certainly, there is a line between where the multi-manager pod shops and the fund-to-funds
whether we call it traditional or revolved, where they meet. And that wine can be, you know, it can be, you know, in certain cases, it could be, you know, they butt right up against each other, I guess is what I would say. But so there's a lot of, they're not the same things, but there's a lot of similarities, I guess is the way that I would put it.
And is investor demand similar? Is there a lot of crossover between the people who are interested in getting pod shop exposure and fund to funds exposure versus people who want to go look for maybe the 50 million manager who's got a new innovative crypto strategy? Are there people who are maybe long-term fund to funds investors who are getting more pod shop curious, things like that?
I think it's all of those. You see people that want to increase their allocation to managers they're already invested with, that they know well established in the industry. You see people that
are more aggressive and they want to, you know, target a more aggressive strategy and a higher return. You see people that have been fund to funds investors and that are excited about some of the innovations that they see there. And you see ones that
are also interested in the multi-manager pod shop space. So it's really all of those things. I mean, the investor is not one thing that, you know, I would say that investors are not, you know, are not taking interest in.
Vanguard just dropped a bomb about their reduction in fees. I think the average Vanguard fund now charges seven bips. Certainly fee compression is something that people have talked about in the hedge fund space. It seems to be a barbell with certain funds facing these fee compression forces, whereas other funds, the big brand names can get away with charging even more fees and justifying it with the reinvestment they're doing in their technology and their teams.
And in many cases, those people who are able to do that, the net performance is still there. Anyway, is that something that you are tracking? We do this in the press release that we do every quarter, the same one we talk about launches and liquidations. So I think it's really yes to all of those things. Certainly, I guess what it comes down to is the value proposition for the investor, right?
not only for the hedge fund industry, but for FADGAR as well. And that certainly people want to invest in funds and they want to get the best management, the lowest management fee that they want. But oftentimes, if you want to invest in the fund you want, and it's a fund that's at capacity and has a long waiting list of people waiting to get into it, then there's really not enough
I guess I'm saying is when you go to invest in the fund, the mayor has mentioned the incentive fees are established by the pool of capital that's in there and all of the demand to be in that. That's obviously what comes with a long history of a successful performance generation. So you do see both. You see from a smaller fund,
you have to represent a value proposition for investors in order to interest them and say, well, you can invest in my fund with $100 million or somebody with 10 billion in order to make that value proposition. Oftentimes they want to be more competitive with fees. And on the other hand, with a fund that's 10 or $20 billion and the funds closed or getting very near closing,
investors are paying the management incentive fee that that they charge and there's really no um in a way it's sort of like that fund at the at the larger end is not really in competition with other people that are trying to aggressively raise assets now there's sort of a you sort of get a different market if you follow what i'm saying where one is sensitive to um
you know, trying to incentivize investors with lower fees and really lower fees is what you're really trying to incentivize them with is higher net performance and lower fees. Part of it is generating returns and the other part is having a lower fee at the same time.
Yeah. And you bring up a great point about that, that the hedge fund industry is bifurcated between these people, that there is tremendous demand, waiting lists, capacity constraint. And we're talking about capacity constraint in the billions. And then at the other end, you have people who would, you know.
sell their unborn child for a $50 million check from a big institution. When you think about the 9,000 or whatever funds that we talked about, how big is that top level compared to the lower level? The question that comes down to is capacity. And it can vary because it depends on what the fund's in. You end up with a larger concentration of...
higher asset funds in a strategy like macro is generally liquid strategies with that are futures trading, trading globally. And it's very obviously it's very marginal. Like your ability to trade those is very, very high. So you end up with you end up with exactly that. Obviously, it becomes a question
When you're looking at other strategies that are more, I guess you could say, capital intensive, you have to look at those a little bit differently. Okay. So you wouldn't say that there are like 50 guys at the top who can charge whatever they want and then there's 9,000 also rands?
Probably more than 50 at the top that are like that. A couple hundred. A couple hundred? Okay. But I mean, that's still a pretty significant ratio of people who are competing with each other versus... The other thing that's kind of true is that, funnily enough, some funds see their capacity as...
in terms of what they're targeting is a much lower number than others. There's some people that have $50 billion and they're not closed. And there's some that at one and a half, they say, oh, we're going to close it too. So it can vary. And again, that has more to do with what they're investing in than how much they want to scale their
I guess is what I'm saying. What would you say is the future of the industry? It seems that asset growth is probably in the future of the industry. It seems multi-managers are probably in the future of the industry. Crypto as well. What are the things we haven't talked about today that you see as very much a part of the evolution?
Yeah, I think all three of those things are huge parts of the industry. I think the trend is towards, you hear it oftentimes that more and more, I guess what I'm saying is you really see a broadening out of the industry.
access to the industry. So it's not a black box niche cottage thing that people in Switzerland invest in. It's something that can be offered to a wider range, a wider pool of investors. And there's different ways that you can do that. But to really see that
broadening out from it being something that somebody else invests into something that anyone can invest in. And that's where I see the industry going in the next five to 10 years is greater access. And that can be through, we have investable index products that are a great way for investors to get exposure to the industry in the same way that they can invest in
an S&P 500 tracking mutual fund or an S&P 500 futures contract, you could invest in investable index products that hold shares in funds or that replicate the industry overall. And there's lots of different variations on that. But I think all of these things and the stuff that we do at HBR is kind of driving this broader trend towards the industry being something that
a larger pool of investors are able to access. And that's really where I see it going. There's a couple of other things that are kind of exciting to think about in terms of, you know, I mentioned some of the things, you know, that the investability for indices is a very important thing, but our firm is also compliant with, and the industry, the index business of HFR has already moved towards a greater market
regulated capacity, if you will. There's a couple of things, and I won't spend a ton of time on this, but investors can go to our website. We're compliant with IOSCO, which is really a best practices that essentially says that
All of the managers that report and we're audited annually to be compliant with this, all the managers that submit to HFR has to agree and write into a code of conduct. This essentially means they stand behind the information they provide to us. We are the only hedge for the index provider that does this. So there's a lot of infrastructure that goes into what we're doing. And we're also compliant with European benchmark regulation, which has been optional up until 2025. It becomes mandatory this year.
And after that point, and we're the only hedge fund index provider that's doing this, that will not be a permissible index for European investors once benchmark regulation is mandatory. And even, I know you probably have a global audience for this. You probably have European and US. And even if you're not a European investor, it matters because the thinking here is that
Europe is probably a couple of years ahead of the U.S. We know every day
Policy changes are coming down fast and furious here. And once they get around to it, there'll probably be a similar paradigm of regulation in the U.S. And we will be compliant with that too. It's become a regulated business. And it's important for the listeners to know that these are all the things that we do and the ways to answer the question, where do we see the industry going next five or 10 years? It's greater accessibility.
accessibility to a larger pool of investors. And a lot of things that we're doing are really enabling that trend. Yeah. And I think the trend of being on the sort of wire house platforms, the wealth management platforms, giving access to, I mean, there's still accredited investors at the end of the day, but
to much more of a retail audience, despite them still being accredited. I know a lot of funds are really putting a lot of weight into reaching that group of investors. And obviously, if more mom and pops are invested in these products, the protections and the regulations are probably going to be greater, not less.
Now, what about speculation as to how the Trump administration might be interested in changing regulation on the hedge fund industry? I'm sure just about every whatever industry you're in, you're hopeful for regulation coming from Trump. Is that something that that you guys are looking at at all? What is coming out of the new Trump administration on hedge funds? Yeah, I mean, we're looking at it. Obviously, they're hitting the in the first two weeks, they're hitting a lot of
big things like tariffs and immigration and deportation pretty aggressively right now. But answer the question, do I know of things that are going to change or do I expect certain changes? I think it's too early to say for sure that that is the case. It's just, there's a lot of things that are changing and that may include
some components of the hedge fund industry, but it's not at the top of the list that's getting
aggressively changed in the first two weeks. Yeah, certainly, certainly not at the top of the checklist. Yeah. Well, Ken, thank you so much for joining us here today. It was a lot of fun and you guys have your finger on the pulse of the hedge fund industry as good as anybody else. I think it would be great to have you back on. Yeah. Certainly in the next year to get an update on where things are in 2026. Yeah, anytime. And like I said, I encourage investors to visit the website and we do a tremendous amount of professionalism
performance commentary, which you obviously receive and we disseminate very broadly. So the best way to keep the pulse on what's happening in the industry is to just see that there's something we're putting out. We put stuff out every month and even intro month stuff. And feel free to reach out to me. You can do it through you guys or reach me directly. And I'd love to come back and talk more about how things are evolving over the course of the year. Thanks, Ken. Thanks for having us on.