GLOBAL - Institutional flow into the hedge fund market will triple by 2010 to reach $1trn (€0.8trn), but only if returns continue to justify fees and higher risks and if managers can provide the quality demanded by institutions, according to new projections.
The predictions come from the Bank of New York and consulting firm Casey, Quirk & Associates.
By 2010 institutions will account for 40% of the assets in the hedge fund market, they said. Retirement plans will represent around 65% of new institutional asset flows into hedge funds worldwide through 2010. The most pronounced growth in flow would come from Europe ex-UK and Asia, mostly Japan.
"These are not commitments the interviewed investors made. It is an extrapolation," Brian Ruane, executive vice president at the Bank of New York, said.
"But the trend will continue if returns remain in the expected range of around 8-9%. In fact, only a continued underperformance of hedge funds could reverse that trend. There will be some soft of maturation in the market, new strategies might evolve, but there will be no reversal."
"Risk management quality, operational quality, and, increasingly, client service are now viewed as critical standard requirements," the Institutional Demand for Hedge Funds 2 report based on 50 interviews with institutional investors and another 50 with hedge funds, fund of hedge funds, industry experts and consultants states.
"Higher quality managers are very happy to disclose information on investment strategies, risk and largest positions", David Aldrich, managing director at the Bank of New York, said. "Those that disclose will benefit going forward", Ruane agreed.
The study also sees a consolidation in the hedge fund market towards a smaller number of multi-strategy houses, away from the proliferation of boutiques. "People who have created brand names will get investment managers to launch products under their umbrella", Aldrich said.
Furthermore, hedge fund like strategies will be taken over into mainstream investment, while within the hedge fund industry long-oriented hedge fund products will become more important. "Partly a result of hedge funds applying their investing techniques to less capacity constrained products and partly due to investors' continued, but changing, interest in long-oriented exposure", the study finds.
The Bank of New York's projections also see a change in the fee-structure over the next four years: Management fees will settle around 1%, performance fees are explicitly tied to alpha and fund-of -hedge fund fees settle in at 50-80 bps from currently 60-100 bps.