Quick Takes: Monitoring of hedge funds
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Ali Curi: Hi everyone, and welcome to ION Markets Quick Takes. I'm Ali Curi, and every week, along with my guests, Amir Khwaja and Chris Barnes, we take a quick dive into the headlines on the Clarus blog. Let's get started. 

Hi, Amir. 

Hi, Chris.

Amir Khwaja: Hi, Ali. 

Chris Barnes: Hey, Ali. How you doing?

Ali Curi: I'm doing great. Welcome back to Quick Takes.

Amir, let's start with you. What's your Quick Take for this week? Which headline from the ClarusFT blog would you like to discuss?

Amir Khwaja: Sure, Ali. It's called, "Monitoring of Hedge Funds." So that's a unusual blog for me because it's not our data. I'm looking at a third party product. So a few weeks ago, I learned that Office of Financial Research of the US Treasury has released a product called The Hedge Fund Monitor.

So I thought I'd look at that. So I guess it's based on existing sets of data that have been collected for, many years by the SEC, CFTC, the Federal Reserve Board. But what the OFI has done with the Hedge Fund Monitor is to put a nice UI with nice graphs and charts on lots of data. So in fact, there are, I think, 84 charts that really cover what's happening in the hedge fund space.

And I think, we're all familiar with hedge funds, but it's nice to see actual data analytics and analysis of trends in hedge funds. These 84-85 charts cover six different categories, and all I've done is done a quick summary in my blog about some of the charts I found interesting as a first stab.

So for each category I've taken one or two charts. So I guess, the most obvious category, which everyone starts with is size. How large is the hedge fund sector? And we all see in the news, hedge funds because they have very high profile founders, they're extremely wealthy, and they're often in the news and quoted, right?

So again, the size chart gives you a sense of how big some of these hedge fund strategies are, and it's done by strategy. We're all familiar with equity, long, short hedge funds, but there's clearly other types, macro, multi strategy, relative value, et cetera. And it gives you a sense, right?

So for example, the largest strategy, as we'd expect, is multi strategy. So hedge funds that trade most asset classes in different strategies. So they have a size of $2.8 trillion gross assets, which has grown a lot in the last five years in terms of size, right? So again, a very substantial sector, which does report lots of details to US regulators.

Also on the next chart, we can see there's now over 2000 qualifying hedge funds above a certain size that are required to report this information on a quarterly basis. And that's up from about 1200, 10 years ago. So again, it's a sector that's increasing both the number of funds and in size of assets held.

So I think there's always interesting in that sense. Leverage, there's been quite a lot of press in the last... that's the last six months about the leverage in that sector, is leverage moving outside the banking sector. And again, I think we've seen stories about the increase of repos.

There's a chart that shows a huge increase in repo usage by the hedge fund sector in the last couple of years, which is interesting. The number of counterparties that trade with hedge funds. So large U. S. banks or GSIBs provide credit to hedge funds for the leverage. And there's charts to show the size of that, of the number of counterparties that trade with liquidity.

But in terms of liquidity for financing of hedge funds, investor liquidity, portfolio liquidity. And I think, all these kind of show trends. There's a lot of quarterly data over trend and we're looking at what is changing in that sector. And and I guess the concern is our risk building up in that sector in terms of they haven't been there in the past.

And I think there's a chart on complexity, which there's only a few charts on complexity, but one covers the use of OTC derivatives, which I find interesting, why that's complex? But anyway, I guess that's for that sector. And then, most interesting, risk management. So again, there are 15 charts on risk management.

The obvious ones like value at risk, stress testing, who uses what. But the one I quite like is one that shows just a quarterly net returns by strategy in the hedge fund sector. And we know as investors invest in hedge funds, A, to get alpha that they can't get in public markets and B, to get diversification returns that are not correlated with public markets, right?

And we can see that in some of these things in these quarterly returns, right? Because I would say is that the swings look, quarterly swings look quite volatile in certain strategies. So for example, in the COVID quarter end of March, 2020, most strategies were down and event strategy was down 12%, but then the next quarter, they were up like 15, 17%, right?

So obviously, huge swings up and down and drawdowns, right? So again, that's all interesting. And really, so I guess in summary, The Hedge Fund Monitor is a new tool, released by the Office of Financial Research of the U. S. Treasury, based on data that's been made public for many years, but with nice charts and APIs, it really brings out what's happening in that sector rather than dry numbers.

And, and that's interesting. And, we're great believers in data, transparency, nice charts, UIs, APIs, right? And really what does, what story does the data tell,? So this is really my first look. I plan to look at it further in the future and get a better sense of what we can see, what trends we can see, what's interesting?

And, hedge funds are an increasing sector in terms of size and assets held and equity invested and returns, et cetera. And so it's is one that shedding more light on the public data is of interest to public markets. Chris, I was going to ask you, were there any questions on that? 

Chris Barnes: Yeah, first off, I just have to congratulate you on a great blog.

I tried to look at those 84 charts about five weeks ago, and I just clicked through and I clicked through and I was looking at it, going, "I should be engaging with this data, but I just can't find like the story or threads about it." And so when I saw the published blog, I must admit, I did a bit of an eye roll, I was like "I've looked at this data. Is it really interesting enough for a blog?" And yet, when somebody goes to the extent of putting a structure around it and looking at data and pulling out interesting charts, it really makes the data accessible and make sense of it. So that now when I go and explore the data, I have a rough idea of what I'm looking for.

So yeah, it's a really good blog. One question for you on the background of the data, "Is that data that is only reported to regulators and not made public? So this is the only way to access the public data or are all of those reports actually publicly available for the 2000 hedge funds which make it up?"

Amir Khwaja: Yeah, good question because I think a lot of it is public, but I think some of it may not be because I did see some notes about they've anonymized certain things. So I assume that is not public, right? So I think it's a mix. 

Chris Barnes: I can imagine a lot of users will try and click on this data for a drill down to which hedge funds are contributing to what?

I think it's a really nice data set as is, it wouldn't surprise me to see a little bit more complexity added over time as well. I'm talking of which, when you talk about the sizes, I see there's a really interesting snippet you've included where you say, there's also separate charts for net assets, which is gross assets minus liabilities.

So does that mean that we can literally see the leverage per strategy? So leverage is going from 10 times to a hundred times, et cetera. 

Amir Khwaja: Oh yeah. Good point, Chris. Yes, I believe so. Yeah. So again, I left a comment in because really I want people to go and look at the actual Hedge Fund Monitor on the OFR website.

And this is just a teaser. So I think there's information that people can, questions they can ask, and those charts will tell them information. So at an aggregate level by strategy, yes, I think you could do that, both returns, leverage, etc, right? One of the ones I find interesting, we spend a lot of time on, on OTC derivatives, right?

Chris Barnes: Yep.

Amir Khwaja: So that chart on complexity, I find interesting how the percentage of derivatives trading that is OTC changes significantly quarter and quarter. 

Chris Barnes: I looked at it and my first thought was it's notional based, perhaps it's full trading it's big notional, swaptions, tails or something. And then I thought no, hang on, swaptions are way too small for these multi strategy funds for it really to take an effect. So I think my gut feeling is that this is capturing activity in FX, as well. Probably FX is treated as an OTC instrument because it's purely bilateral. And I imagine from churn and sheer number of trades and notional, that a lot of this is FX options and forwards as well, I think.

Amir Khwaja: Yeah, possibly, yeah. So I guess the plan is to introduce our listeners and readers to this new tool, The Hedge Fund Monitor from OFR, to provide a first look. And then over time, I think either you and I, or both of us, will cover certain aspects in more detail, right? Because there are so many charts in each category, right?

Just purely, I think there's 85 charts in total, I don't know, 84? And just in the size category, there are 32 charts, right? So I think each provide different information, mostly based on data that's already public. But I think some, maybe not, that they've taken data that only regulators have anonymized and put out there in some sort of way.

Chris Barnes: Thanks, Amir. That's great. 

Amir Khwaja: Great Ali, back to you. 

Ali Curi: Great. Thank you, Amir. And please share with us again, the title of your blog post. 

Amir Khwaja: Sure, Ali. It's called, "Monitoring of Hedge Funds." 

Ali Curi: Short and sweet. We like that. Amir Khwaja, Chris Barnes, thank you both for sharing your Quick Takes, let's do it again next week.

Amir Khwaja: Thanks, Ali.

Chris Barnes: Thanks, Ali. See you next week. 

Ali Curi: And that's our episode for today. You can read more about these topics on the Clarus blog, and you can follow ION Markets on X and on LinkedIn. 

Thank you for joining us.