In the summer of 2001, Barton Biggs captured the attention of hedge fund managers when he announced to the world that their industry was in the midst of a bubble. Morgan Stanley’s chief market strategist at the time, Biggs likened investments flowing into hedge funds, which then managed a collective $500 billion, to a gold rush and warned that sizable blowups were imminent.

   A few years later, when Jes Staley, CEO of JPMorgan Asset Management, persuaded his bosses at JPMorgan Chase & Co. to buy a majority stake in hedge fund firm Highbridge Capital Management, it looked like Biggs might have been right. When the deal was announced in September 2004, assets under management in Highbridge’s multistrategy hedge funds totaled just $7 billion, which many market participants thought hardly justified the $1.3 billion that JPMorgan reportedly was paying for the New York–based firm. The biggest beneficiaries of the deal, they said, would be Highbridge co-founders Glenn Dubin and Henry Swieca. When analysts’ predictions of a flurry of copycat acquisitions didn’t immediately materialize, there was even speculation that Dubin and Swieca would end up buying back their firm.

   That was then.

   Now, JPMorgan is perched atop the hedge fund mountain with $33 billion in hedge fund assets, $15.7 billion of it managed by Highbridge, and there is little doubt about the merits of the deal. Last year JPMorgan saw its single-manager assets soar 70 percent, up from $19.5 billion at the end of 2005, growth Staley largely credits to the maturation of the relationship between JPMorgan’s private banking business and Highbridge. Biggs’s warning hasn’t been completely forgotten, but it hasn’t had any impact on investor demand for hedge funds, which controlled an estimated $1.46 trillion in assets as of year-end 2006, according to Chicago-based Hedge Fund Research.

   “The growth in the hedge fund market is for real,” says Staley, explaining that institutionalization is driving the top firms to get even bigger. “This is not a bubble.”
The firms that make up Alpha’s 2007 Hedge Fund 100, our sixth annual ranking of the world’s biggest hedge fund managers, would certainly agree. Together they managed a cool $1 trillion in hedge fund assets as of December 31, 2006 — up from the $720 billion managed by the 100 firms on our list a year ago. The 39 percent rise in assets marks the biggest annual increase since we began tracking single-manager funds. And the firms in the Hedge Fund 100 have never been so dominant. They control 69 percent of the hedge fund industry’s assets, up from 65 percent a year ago.

   The amount of money managed by the individual firms on the list is also staggering. The top three — JPMorgan, Goldman Sachs Asset Management and Bridgewater Associates — each have at least $30 billion under management. By comparison, a year ago Goldman and Bridgewater were the only firms to break the $20 billion barrier. But the wealth this year isn’t just going to the very top; 38 firms manage at least $10 billion, up from 19 in the previous ranking.

   The success of New York– based Goldman is especially telling. Unlike JPMorgan, whose asset growth got a boost from a 24.7 percent net return in its flagship Highbridge Capital Corp. fund, Goldman’s hedge fund products generally turned in less than stellar performances. The firm’s $12.5 billion Global Alpha fund, which was up 39.9 percent net in 2005, fell 6 percent last year. Nonetheless, Goldman’s single-manager hedge fund assets grew $11.5 billion, to $32.5 billion, demonstrating the impact of the marketing reach and brand power of a top securities firm.

   Westport, Connecticut–based Bridgewater, which drops from No. 2 to No. 3 this year, also shows the benefits that a broader business approach can have for hedge funds. The firm, which manages $130 billion in traditional assets, grew its hedge funds by more than $9 billion in 2006, to $30.2 billion, as many of its existing clients moved money from long-only accounts into its Pure Alpha Strategy. Although Pure Alpha was up less than 4 percent each of the past two years, the low-risk fund is popular among more conservative institutions for its noncorrelated returns.

   The industry’s biggest players are bulking up for a reason: They are after more permanent capital and the security it can provide. Having a steadier capital base makes it easier for firms to keep top-notch fund managers and to avoid the potential problem of liquidating positions to meet ill-timed investor redemptions.