Hedge Fund Update

February 3, 2011
Page 1 of 4

This report represents the latest in an ongoing series represented by the total return of the Standard &
of semi-annual reports regarding the state of the Poor’s 500 at +15.06%; or, Barcap Agg U.S. Bond
hedge fund industry. Hedge funds have grown in Index at +6.37%.
size and significance over the past decade or two to
represent one of the most important segments of 2010 Asset Class Performance
the levered trading community.
2010 Total
Asset Class Benchmark
In fact, hedge funds now represent CME Group’s Return
third most significant customer segment behind HFR Composite Index +10.49%
bank/dealers and proprietary (prop) trading firms. Standard & Poor’s 500 Index +15.06%
They accounted for approximately 10% of CME Barcap Agg US Bond Index +6.37%
Group exchange volume in 2010, up from about 9%
in 2009. Thus, progress in this industry bears close The number of hedge funds identified by HFR was
watch as a key contributor to CME Group success. recorded at 7,164 at the conclusion of 2010 (ex-
fund of funds or “FoFs”). The current total falls
short of the high water mark of 7,634 recorded at
HFR Index Monthly Returns
6% the conclusion of 2007 but represents a sizable
advance over the 6,883 hedge funds identified at
4% the conclusion of 2009.
2%
Assets under management (AUM) increased to $1.92
0% trillion by the conclusion of 2010 representing
growth of 19.8% over the $1.60 trillion in AUM at
-2% the conclusion of 2009. This trumps the previous
-4%
high water market of $1.87 recorded at the
conclusion of 2007.
-6%
Size of Hedge Fund Industry
-8%
$2,400 9,000
May-06
Sep-06

May-07
Sep-07

May-08
Sep-08

May-09
Sep-09

May-10
Sep-10
Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

8,000
Assets Under Mgt (Bil)

$2,000

No. of Hedge Funds

7,000
$1,600 6,000
Source: Hedge Fund Research
5,000
$1,200
Health of Hedge Fund Industry – The health of 4,000
the hedge fund industry may be regarded as a $800 3,000
reasonable barometer of the interest in leveraged 2,000
derivative trading. $400
1,000
The hedge fund industry generated a reasonable $0 0
return of +10.49% in 2010, according to Hedge
1996

1998

2000

2002

2004

2006

2008

Q1 10

Q3 10

Fund Research (HFR), following up 2009’s stellar

+20.12%. Much of this growth was realized as a
# of HFs (ex-FoFs) Assets Under Mgt
result of strong 2nd half 2010 returns after a rather
tepid 1st half the year. As such, the industry has Source: Hedge Fund Research
now experienced back-to-back good years after
2008’s return of -18.36%. Note that funds of funds As such, we now appear to have fewer funds
(FOFs) generated returns of 5.60% during 2010, managing more assets than was the case a few
noting that this figure includes fees charged by the years ago. This suggests that investors are
operators of such FOFs. increasingly directing their funds to the larger and
well established hedge fund managers. In any
The hedge fund industry performed reasonably well event, the hedge fund industry is healthy and
as a stand-alone investment. But it further held its realizing strong growth as of the end of 2010.
own relative to the U.S. stock market and the U.S. Performance by Strategy – HFR generally
fixed income market. Stocks and bonds may be categorizes hedge fund trading strategies into four

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Hedge Fund Update
February 3, 2011
Page 2 of 4

broad categories including equity hedge, event- traded at CME Group. The table below summarizes
driven, macro and relative value. These four hedge fund industry performance by strategy
categories account for 30%, 26%, 20% and 245% including an indication of whether particular sub-
of hedge fund industry assets, respectively. categorical funds may be considered futures
customers. Note that 47.31% of hedge funds fall
Dec-10 AUM by Strategy within the “trades futures” designation.
(Trillion $s)
The most significant of these hedge fund categories
Relative that often trade futures include the multi-strategy
Value, relative value funds (AUM = $289.8 bil),
$0.469 Equity discretionary thematic macro funds (AUM = $147.3
Hedge,
bil) and systematic diversified macro funds (AUM =
$0.571
$132.0 bil). Many of the most significant and well-
known hedge funds are active participants in CME
Group markets.

Appetite for Risk - We expect that demand for

Macro, aggressive and leveraged investment strategies, as
$0.381 might be pursued by hedge funds and other types of
Event-
Driven,
CME Group customers, will be strong in coming
$0.497 years. This is underscored by the persistent gap
between pension fund assets and the present value
of their obligations.
Returns were distributed rather evenly across these
sectors of the hedge fund industry in 2010 with the Pension Funding Gap vs. S&P 500
equity hedge sector generating returns of +10.58%; $300 39%
event-driven at +11.53%; macro at +8.61%; and,
Pension Funding (Billions)

relative value at +11.73%. Growth in AUM was $200 26%

S&P 500 Total Return

most visible amongst macro funds which grew by $100
31.7%; followed by the event-driven funds whose 13%
assets increased 20.2%; relative value funds at $0
0%
+19.8%; and, equity hedge funds at +12.7%. -$100
-13%
Performance by Strategy -$200
145 -$300 -26%
140
135
12/31/05 = 100.00

-$400 -39%
130
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010

125
120
115
Pension Funding Status S&P 500 Total Return
110
105 Source: Standard & Poor's
100
95 The funding gap between the present value of future
90
obligations and assets held by the pension funds of
85
the corporations that comprise the S&P 500 remains
Apr-06
Aug-06

Apr-07
Aug-07

Apr-08
Aug-08

Apr-09
Aug-09

Apr-10
Aug-10
Dec-05

Dec-06

Dec-07

Dec-08

Dec-09

Dec-10

critical. The gap stood at $261 billion at the

Equity Hedge
Relative Value
Source: Hedge Fund Research
The industry may be further broken down into
multiple strategic sub-categories. Of course, we
have particular interest in the types of hedge funds
that find use for futures markets such as those
conclusion of 2009, an improvement from the $308
billion gap observed at the conclusion of 2010 but
Event-Driven Macro still a difficult gap to plug. The 2010 total return of
Composite
+15.09% in the S&P 500 likely served to narrowed
the gap a bit. While data regarding the 2010 gap is
unavailable as of this writing, we believe it will
remain significant.

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Hedge Fund Update
February 3, 2011
Page 3 of 4
We believe it is safe to conclude that these pension
funds and other investors will continue to turn to
aggressive and levered trading and investment
strategies as might be offered by exchange-traded
and over-the-counter (OTC) derivatives. In other
words, these funds or their appointed asset
managers will have need for the type of trading and
risk-management products offered by CME Group.
Concluding Remarks – Hedge funds represent a
very significant driver of CME Group growth. Thus,
we must continue to pay careful attention to the
customer segment as an important barometer of
CME Group performance. The hedge fund industry
posted very reasonable returns in 2010, contributing
to a significant increase in assets under
management. As such, the hedge fund industry
appears to have mounted a nearly complete
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recovery from the recent financial crisis and in good
shape to continue to participate in CME Group
markets.
For more information, please contact …
John W. Labuszewski, Managing Director
Research & Product Development
312-466-7469, jlab@cmegroup.com
Richard Stevens, Director
Research & Product Development
011-44-207-796-7129
Richard.stevens@cmegroup.com
Tina Lemieux, Managing Director
Hedge Fund and Broker Services
312-930-3151, tina.lemieux@cmegroup.com
  
Hedge Fund Update
February 3, 2011
Page 4 of 4

Hedge Fund Industry Performance by Strategy

(2010)

AUM YTD 2010 YTD 2010 Trades

Strategy
(6/30/10) AUM Flow Return Futures?
Energy/Basic Materials $36,851 22.1% 17.38%
Equity Market Neutral $30,401 3.4% 3.16%
Fundamental Growth $81,621 10.3%
Fundamental Value $358,713 10.9%
Multi-Strategy $5,839 3.9%
Quantitative Directional $14,351 -4.2% 9.33%
Short Bias $1,576 -57.2% -18.38%
Technology/Healthcare $41,248 64.6% 9.79%
EQUITY HEDGE TOTAL $570,601 12.7% 10.58%
Activist $46,802 29.2%
Credit Arbitrage $4,535 13.4%
Distressed/Restructuring $122,403 16.9% 11.26%
Merger Arbitrage $16,632 27.1% 4.60%
Multi-Strategy $18,776 90.0%
Private Issue/Regulation D $5,244 25.7% 11.41%
Special Situations $282,926 17.1%
EVENT-DRIVEN TOTAL $497,318 20.2% 11.53%
Active Trading $13,343 62.3%
Commodity $20,792 52.9%
Currency - Discretionary $8,388 40.2%
Currency - Systematic $19,648 18.4%
Discretionary Thematic $147,293 15.0%
Multi-Strategy $39,328 52.9%
Systematic Diversified $132,040 45.4% 9.69%
MACRO TOTAL $380,833 31.7% 8.61%
Fixed Income - Asset Backed $31,509 22.3% 13.36%
Fixed Income - Convertible Arb $40,810 16.4% 13.07%
Fixed Income - Corporate $75,974 26.8% 11.73%
Fixed Income - Sovereign $12,885 21.9%
Multi-Strategy $289,804 19.6% 13.87%
Volatility $9,019 -5.1%
Yield Alternatives $8,632 8.1% 13.28%
RELATIVE VALUE TOTAL $468,633 19.8% 11.73%
HEDGE FUND INDUSTRY TOTAL $1,917,385 19.8% 10.49%
FUND OF FUNDS (FOFs) $646,282 13.1% 5.60%

Source: Hedge Fund Research (HFR)

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