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European institutions’ hedge fund use “jumps”

EUROPE – Hedge funds have now moved into the mainstream with 32% of European institutions now using them, Greenwich Associates says.

“Among European institutions, the proportion using hedge funds jumped to 32% in 2004 from 23% a year earlier,” the Connecticut-based consulting firm said. It added that US institutional use climbed to 28% from 23% in 2004.

Greenwich said institutional capital is making up a growing portion of hedge fund inflows. Allocations are reaching levels “at which they could have a noticeable impact on overall performance”.

It added that hedge funds are becoming more ‘professional’ to meet the transparency, servicing, and other requirements of large institutional investors. And the line between traditional asset management firms and hedge funds was blurring.

The cost of complying with new US Securities and Exchange Commission rules would “weed out” some smaller hedge funds.

It warned that hedge fund returns were diminishing as more institutions became involved. It said: “As more money flows into the sector and hedge funds proliferate, arbitrage opportunities are diminishing.

“The consultants at Greenwich Associates view it as unlikely that hedge funds as a broad-based industry of hundreds of billions of dollars will be able to replicate the robust returns generated by a relatively small number of funds in recent years.”

With executives moving from traditional firms to hedge funds, Greenwich said institutions may already see hedge funds as a “high-priced mechanism for accessing alpha generation opportunities and the top talent in the industry”.

“Hedge funds are maturing into a mainstream institutional investment product or asset-class, and a cadre of firmly established hedge fund managers has the potential to evolve into something of a second-generation asset-management industry,” said consultant Chris McNickle.

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