Global assets to quadruple in 10 years

Even though it hasn’t been the best year for hedge funds, the US$1 trillion world hedge fund market is likely to experience rapid growth and could even quadruple by the end of the decade.

This increase will come despite other possible barriers to growth apart from poor performance, including increased regulation of hedge fund markets and the fraud-driven collapse of some large hedge fund managers in the United States and Britain.

Such optimism comes from Boston-based consultancy Cerulli Associates, which has released an analysis of the sector.

“ ... hedge fund managers conceded that the speed of future hedge fund growth is predicated on the industry’s ability to mitigate concerns about performance (35.7 per cent) and seismic collapse (35.7 per cent),” said Cerulli senior analyst Benjamin Poor, who wrote the report.

Three main drivers of hedge fund growth will be demand for absolute returns, different investment techniques, and the need for a unique vehicle structure, according to Poor.

So to will be increased accessibility to retail investors.

“While high-net-worth investors are the traditional bailiwick of hedge fund managers, hedge funds have been unable to latch on to lower-net-worth investors, due not only to investor preferences, but also to lack of regulation and transparency. Nonetheless, the advent of fund of hedge funds (FOHFs) and hedge mutual funds greatly increases the availability and ease of the use for retail investors,” Poor said.

Despite looming regulation of the hedge fund industry by the US Securities Exchange Commission set to push up compliance costs, Poor is confident increased regulation will ultimately benefit hedge fund providers by increasing transparency and investor confidence in what are much misunderstood products.

Cerulli has also predicted that, despite increasing demand from institutions, hedge fund fees are not on the way down.

“Those who compete on price may not be around in five years,” the report said.

But fees will more likely drop for fund of hedge funds.

“Their overlay charge comes on top of underlying hedge fund fees, and competition from consultants and advisers should limit what FOHFs can charge.”