The List: The World's Largest Hedge Funds

Enormously powerful, the world’s hedge funds together hold about $1.5 trillion in assets. But it’s not easy to pin down what these secretive, diversified investment firms are up to. In this week’s List, FP looks at the five biggest players and just where these new “masters of the universe” spend their billions.

JPMorgan Asset Management

Assets: $33 billion

Based in: New York

What its into: Pretty much everything. For instance, the fund manages a range of statistical arbitrage products; in other words, it exploits various inconsistencies in the market. Its into real estate, with investments in India and China as well as developed countries. Recently, it has also invested in infrastructure, including a road toll in Texas. JPMAM is continuing to move into the Asian market, where it just secured a license to operate in South Korea.

Strategy: Diversify, diversify, diversify. JPMorgan Asset Management employs multiple managers using multiple strategies, with 680 specialists working within its structure. The fund insists that it maintains a balance between qualitative and quantitative financial tools to assess risks and returns. But its autonomous Highbridge division, the hedge fund it bought a controlling stake in three years ago, utilizes highly quantitative methods and manages nearly half of the $33 billion the overall hedge fund manages. JPMAM is also enthusiastic about behavioral finance investment strategies that bet against what its statistical models perceive as irrational movements in the market. JPMAM is now also openly focusing on absolute return investing, which means its going for market neutralitymeeting targets in spite of what the markets doing. How? By using long-short investing techniques. This involves borrowing and then selling stocks that they believe will decrease in price in the short term, and then buying them back to return them when the price goes down, pocketing the difference. At the same time, the fund uses the extra cash from the short sale to buy other better performing stocks that they bet will go up in the future.

Goldman Sachs Asset Management

Assets: $32.5 billion

Based in: New York

What its into: A lot, but like most hedge funds, the firm is pretty secretive. GSAM invests in equitybuying stocks in businesses in the United States and around the world, especially when it believes their prices are undervalued. Its also into currency, fixed income, private equity, real estate, and alternative assets, like venture capital and infrastructure, that have longer time horizons.

Strategy: GSAM is a multistrategy fund that tends to work on under-researched markets and capitalize on arbitrage opportunities. For better or worse, the fund makes extensive use of quantitative strategies that rely on computer modeling of markets. GSAMs long-short Global Equity Opportunities fund and its Global Alpha fund both lost around 30 percent of their value this year as a result of their inability to predict the subprime fallout. Goldman Sachs ultimately intervened with $3 billion ($2 billion of it the firms own money) in what many believed was a bailout. In the same way that the returns of purely quant funds can be remarkable, their losses can also be magnified.

Bridgewater Associates

Assets: $30.2 billion

Based in: Westport, Connecticut

What its into: Currency, global fixed income, bonds, emerging markets, commodities, and most recently, equity investments

Strategy: Its all about alphaand a bit of beta, too. In other words, its heavily quantitative. In the early 1990s, Bridgewater essentially pioneered the separation of alpha (the gains experienced by stocks independent of general market movements) and beta (the gains in stocks that can be explained by market movements). Bridgewater is focused almost exclusively now on delivering alpha to its clients, which are primarily institutions such as foreign governments, central banks, university endowments, pension funds, and charities. Reports suggest that Bridgewater is trying to convert all its clients to using alpha-generating strategies, which theoretically deliver higher returns, but can be elusive to identify. Bridgewater also uses currency overlays, which help pension funds manage the risk of currency fluctuations. To diversify, Bridgewater ensures it spreads its investments across markets and instruments that dont necessarily move together.

D.E. Shaw Group

Assets: $27.3 billion

Based in: New York

What its into: Buyouts of existing companies, especially ones on the verge of bankruptcy; financing and developing new companies; venture capital; distressed debt; energy and power; commodities; emerging markets; currencies; and real estate. Of late, its been dabbling in private equity and direct lending as well. D.E. Shaw also owns two toy companiesFAO Schwarz and eToysthat it bought after they sought Chapter 11 bankruptcy protection.

Strategy: Hire the whiz kids. For all the funds secrecy, it is widely known that only one in 500 D.E. Shaw applicants makes the cut, and that it is staffed with numerous former Rhodes, Marshall, and Fulbright scholars as well as winners of prestigious math competitions. D.E. Shaw was one of the pioneers of quantitative investing using complex mathematical and computer techniques to figure out profitable investment strategies. Trading almost 24 hours a day, the fund seeks to profit from arbitrage. Advanced technology is one of D.E. Shaws main strengthsin fact, it even describes itself as a global investment and technology development firm. However, as with other quantitative funds, it has also been hard hit by the subprime mortgage fallout. Its now seeking to acquire entire companies on a long-term basis in an effort to diversify.

Farallon Capital Management

Assets: $26.2 billion

Based in: San Francisco

What its into: Debt and equity securities, mergers, restructurings and recapitalizations, venture capitalism, real estate, and emerging markets, including India

Strategy: Plenty of arbitragefor instance, in risk and mergers. Farallons clients include institutions, especially university endowments, and super-rich individuals. The fund is highly event-driven, always on the lookout for companies undergoing major changes that will result in increased value. Spotting these, Farallon invests, usually hedging on short positions in other financial instruments to help offset potential losses. For instance, Farallon may have recently cashed in on bargains resulting from the housing markets troubles. In March, it partnered with Simon Property Group to acquire another real estate investment trust, Mills Corp., and also injected a $230 million loan into Accredited Home Lenders Holding Co., helping stave off its subprime pressures. In April, it bought Affordable Residential Communities, a manufactured-home community business.

Note: The figures for these hedge funds are taken from Alpha Magazines 2007 Hedge Fund 100 rankings, a widely respected source of data for the hedge fund industry. Figures are likely to have changed since the time of the rankings.

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