Hedge Funds Down but not Out

A news release by The Bank of New York Mellon (BoNY) and Casey, Quirk & Associates about the study conducted by the two firms predicted hedge fund assets will bottom out at roughly $1 trillion in 2009. After that, according to researchers, capital appreciation and $800 billion in net inflows over the next four years   will push global asset levels to $2.6 trillion.

According to the BoNY/Mellon report, institutional investors made up less than 20% of hedge fund redemptions in 2008-2009, and North American pension plans will represent the single largest source of new capital between 2010 and 2013, followed by British and Northern European institutions. Global high net worth investors could account for as much as 60% of new net flows between 2010 and 2013, although their return to hedge fund strategies will rely on capital market conditions and hedge fund performance.

Funds of hedge funds will solidify their role as the primary hedge fund distribution channel, capturing almost 60% of net inflows between 2010 and 2013 by continuing to offer services most investors will find difficult to replicate on their own, such as manager-sourcing and ongoing due diligence, the study said. 

According to the report, the hedge fund industry is facing a “transformational crisis” and must address key shortcomings in its business and operating models.  As a result, hedge funds will rely more on third parties for a growing range of administrative support.  Fund administrators will play a greater role in hedge funds’ operations, which will require stronger integration of hedge fund servicing activity with traditional custody and cash platforms, researchers said.  

Future Business Models

The researchers said four models likely to thrive in the coming years include:

• Single-Strategy Boutique:  ‘Classic’ hedge fund, dominated by a typical direct investment capability using hedge fund techniques .
• Multi-Capability Platform:  Common brand, distribution and business infrastructure support multiple distinct alternative investment capabilities.
• Merchant Bank Alternative Manager:  Diversified financial intermediation business with core capabilities in investment management.
• Converged Traditional-Alternative Manager:  Investment firm that has successfully integrated alternative and traditional long-only capabilities

Results from this year’s study relied on interviews with more than 150 institutional investors, investment consultants, hedge funds, funds of hedge funds, and industry experts.