Goldman Sachs Tops List of Hedge Fund Giants

Westport, Conn.-based quantitative hedge fund Bridgewater Associates, kept its second position from last year with $20.9 billion of assets under management. D.E. Shaw, another quantitative fund, is number three with $19.9 billion, moving up from its seventh position of last year.

"More quantitative-driven shops will be on the top of the list just because quantitative managers tend to be less capacity-strained. It's part of the quantitative investing process," says Aaron Dorr, managing director at Putnam Lovell, an investment bank specializing in the asset management industry. "Quant shops" invest based on quantitative analysis, using computer-based models. Because the same process can be used for a great number of securities, those funds tend to become big in size. For instance, Dorr says, a quantitative process can be applied to a long/short large-cap strategy, and then the same methods can be repeated for small-cap, medium-cap, currencies, etc.

The top three hedge funds on the list, with about $20 billion in assets each, have grown to mega-size size level, catering to large institutional investors in a development that reflects the evolution of the industry as a whole. Hedge fund assets grew to an astonishing 125% rate from 2000 to 2005 to nearly $1.1 trillion, according to Hedge Fund Research. Each of the top three firms grew by at least $9 billion last year. "I don't think the industry is growing because it's institutional. I think the industry is forced to become institutional because it's growing," says Dorr.

Rounding out the top five is Greenwich, Conn.-based ESL Investments, with $15.5 billion in assets. The firm is run by Edward Lampert, who orchestrated the merger between Kmart and Sears Holdings(SHLD Quote) in 2004.

Several large hedge funds that were among the top-10 last year dropped down on the list. The most notable is Chicago-based Citadel Investment Group that fell out of the top 10 for the first time since the rankings were first introduced five years ago. Citadel was hurt in the energy sector last year. Madrid-based Vega Asset Management fell from number nine to number 29. The global-macro hedge fund run by Ravinder Mehra, suffered massive redemptions last year due to a decline in performance. Similarly, GLG Partners, a London-based manager, dropped from number four to number 14 due to a difficult year in convertible arbitrage.