Hedge funds, launched in 1949, were once an investment vehicle used only by the most advanced investors. Although these funds have become more popular over the decades, they are still considered high-risk and volatile.
With great risk, however, comes the potential for great reward. But when participating in high-risk investing, a reward is never guaranteed. To help you learn which hedge funds might be a good investment choice for your portfolio, here’s information about the top 10 individual hedge funds in the U.S.
What Is a Hedge Fund?
In many ways, a hedge fund is an ultrasophisticated mutual fund. Like mutual funds, hedge funds take a pool of investor money and invest it in a variety of investments. Hedge fund managers benefit from the fact, however, that hedge funds are not regulated in the same way as mutual funds. Thus, the list of trades for a hedge fund can look quite different from that of a traditional mutual fund.
Here are the top 10 largest individual hedge funds in the U.S., ranked by the three-year average performance by Barron’s, a financial investment news provider. For purposes of computing the 10 biggest hedge funds, only assets in individual hedge funds are considered, rather than the total amount of hedge fund assets in the parent company.
|Top 10 Hedge Funds in the U.S.|
|Firm Name/Location||Hedge Fund Name||Assets||Three-Year Compound Average Return (Percent)||2016 Return (Percent)|
|Renaissance Technologies, New York||Renaissance Institutional Equities||$14,935,000||17.75||21.46|
|Element Capital Management, New York||Element Capital||$9,500,000||14.66||19.37|
|Renaissance Technologies, New York||Renaissance Institutional Diversified Alpha||$10,500,000||12.74||10.67|
|Capital Fund Management, Paris||Stratus (9% Target Vol)||$5,424,000||12.47||-3.72|
|Citadel, Chicago||Citadel Kensington Global Strategies||$16,581,000||12.43||4.71|
|D.E. Shaw Group, New York||D.E. Shaw Composite||$10,848,000||12.24||6.25|
|TCI Fund Management, London||The Children’s Investment Fund||$12,800,000||12.00||13.50|
|Adage Capital Management, Boston||Adage Capital Partners||$27,700,000||9.39||9.50|
|Millennium International Management, New York||Millennium International||$34,070,000||9.25||3.34|
|Capula Investment Management, London||Capula Global RV Class F (USD)||$9,529,000||8.55||8.94|
|Information accurate as of Dec. 22, 2017.|
Renaissance Institutional Equities
Renaissance Institutional Equities is the top dog regarding performance on the top 10 list, posting the sixth-highest three-year average return among all hedge funds — a major feat considering the fund is the fourth-largest hedge fund of all, with close to $15 billion in AUM. Institutional Equities is the largest and oldest of the $50 billion firm’s three hedge funds that remain open to investors and invests using a quantitative, equity long-bias strategy. Simply put, the firm relies on systematic trading rules rather than discretionary investment choices, and it is typically invested in equities.
Element Capital boasts impressive returns both for 2016 and over its three-year average, at 19.37 percent and 14.66 percent, respectively. Based out of New York, the macro fund selects investments based on market risk and the global flow of capital, rather than security-specific information. Macro funds like Element are typically more concerned with economic policies and employ interest rate strategies, currency strategies and/or stock index strategies to invest.
Renaissance Institutional Diversified Alpha
The second Renaissance fund in the top three on the list, Renaissance Institutional Diversified Alpha, is also a “quant” fund, like its sibling Renaissance Institutional Equities. The Diversified Alpha fund uses a global multistrategy approach to investing, unlike Institutional Equities’ Equity Long-Bias strategy. As a result, the Diversified Alpha fund uses a multitude of trading and investing strategies anywhere in the world in an effort to generate high returns.
Stratus (9 Percent Target Vol)
The Stratus (9 percent Target Vol) fund has posted admirable three-year average returns of 12.47 percent, even in the face of a disappointing -3.72 percent return in 2016. Stratus, run by Capital Management out of Paris, is a quantitative fund that uses the firm’s proprietary “alpha strategies,” which include directional volatility, intraday trading, directional trading, statistical equity arbitrage and statistical volatility arbitrage trading strategies. The fund is the smallest on the top 10 list but still manages more than $5 billion in assets.
Citadel Kensington Global Strategies
Citadel Kensington Global Strategies is another massive multistrategy hedge fund with impressive results; The $16.5+ billion fund returned 12.43 percent as a three-year compound annual average, after middling returns of 4.71 percent in 2016. Headed by noted hedge fund manager Ken Griffin, this fund is noteworthy in that it is trimming its investor base in 2017, returning the complete investments of some customers in an effort to reduce the assets it has to manage.
D.E. Shaw Composite
The D.E. Shaw Composite fund is something of a jack-of-all-trades when it comes to investing. The fund invests in both equity and fixed-income securities using a variety of strategies, including equity-linked strategies, macro strategies, corporate credit strategies and equity arbitrage strategies. Overall, the fund is market-neutral, meaning both long and short positions are used to minimize overall market exposure while making concentrated bets on specific securities.
The Children’s Investment Fund
The Children’s Investment Fund, managed by TCI Fund Management out of London, is an equity long/short fund. As the name implies, the fund buys stocks it anticipates will rise while shorting stocks it judges will fall. Long/short funds typically try to keep an equity exposure close to zero percent by balancing long and short positions, however, long/short funds are not always market neutral and are free to invest according to different strategies.
Adage Capital Partners
Adage Capital Partners is a huge fund, with over $27 billion in assets under management. The fund employs a long/short equity strategy and returned 9.39 and 9.50 percent over the last three years and in 2016, respectively.
Adage has a unique fee structure that benefits investors. Rather than a traditional fund that takes 20 percent of investors’ profits, Adage Capital Partners only collects 20 percent of its gains that exceed a benchmark, such as the Standard and Poor’s 500 index.
The largest individual hedge fund on the top 10 list, with more than $34 billion under management, Millennium International posted a three-year average return of 9.25 percent. The fund has a multistrategy approach to investing and relies heavily on currency hedging. Specifically, the firm invests in alternative markets using a fundamental discretionary approach, which focuses on identifying undervalued investments based on existing financial information. Discretionary managers like Millennium typically do “deep dives” on a small number of securities, which usually results in concentrated portfolios.
Capula Global RV Class F (USD)
The Capula Global Relative Value fund is unlike many others in this list in that it invests primarily in government securities, rather than equities. As a hedge fund, however, the Capula Global fund doesn’t just buy Treasurys, rather, it uses a more complex strategy of fixed-income arbitrage. Many different types of fixed-income arbitrage exist and some are quite esoteric, in general. For example, funds like Capula Global try to benefit from pricing inefficiencies in fixed-income securities.