GLOBAL – Merrill Lynch, predicting a rise in the use of alternative asset management in Europe in 2005, has likened hedge funds to Apple’s iPod portable music system.

“To shift analogies, hedge funds are a bit like iPods,” the firm said in a research note. “They have a fashion/design/cool component, but their real appeal, we reckon, is that they actually do something useful, albeit at some cost.”

And it added: “We believe that within an overall rosy picture for asset management, the alternative industry should see market share gains. This is because the alternative industry provides what investors need.”

“Our belief is that the alternative industry is likely to prosper because portfolios are at present sub-optimally diversified.”

And it said: “We believe that the performance characteristics which the alternative industry has displayed in the past fills a clear need for investors seek to match long-term liabilities.” The shift towards alternatives was “structural, not cyclical or a bubble”.

The firm said it expects the asset management industry overall to meet with good demand in the next year. “The bull case is simply that a combination of demographics and market falls post 2000 have left the world with underfunded pension liabilities, be they explicit in the form of DB schemes requiring additional contributions or individuals who are not saving enough for retirement.”

It extrapolated from the UK’s Pension Commission to put the global pension funding gap at “£1Tr plus” (E1.43tn).

Merrill’s note was partly based on IPE’s European Leaders 2004. For more information, please contact Emma Morgan Jones at or 44 20 7261 4617.