A company news release said that the study predicts that demand will accelerate both because of the better performance of hedge funds and also because hedge funds have reached their “tipping point.” Capacity is expanding to meet demand as hedge funds implement new strategies and enter new markets, the Van Hedge Fund study said.
According to the study, new, expanding sectors include energy, private equity, real estate, middle-market lending and asset-backed financing. Capacity growth also has been facilitated by the increasing use of exchange-traded funds (ETFs) and credit derivatives.
Developed economies beginning to embrace hedge funds include Canada, some European countries and Japan. Developing economies beginning to adopt hedge funds include Brazil and South Africa and, in Asia, Hong Kong, Singapore, Taiwan, and Korea. In a few years, China and India will add “enormous” capacity, the study said.
The study stated that certain characteristics of many hedge funds will not noticeably impede growth. These characteristics include high fees, low liquidity, low transparency, and leverage. Similarly, new and anticipated regulation will have only an “imperceptible” impact on both US and non-US industry growth.
According to the study, many hedge fund managers worldwide are concerned about new Securities and Exchange Commission (SEC) registration regulations. These regulations require that US and offshore hedge fund managers register with the SEC by February 2006, if they have a specified number of US investors and certain other characteristics.
Hedge Fund Strategies
Examining individual hedge strategies, at one end of the spectrum, highly specialized traditional strategies, that access narrow slices of the markets, have been stressed by the heavy capital inflows of 2003, 2004 and 2005 to date, the study said. These specialized strategies include Statistical and Convertible Arbitrage. The latter appears to be recovering well. However, investors should be aware that the same capital inflows that recently swamped convertible arbitrage funds could well flood in again when that strategy returns to solid profitability.
At the other end of the spectrum, strategies that have access to broad and deep markets have remained virtually unaffected. These include Futures and Macro strategies.
Between the two extremes described above, other traditional strategies have been impacted but most will recover, especially with their ability to expand into non-traditional markets such as developed and developing countries that are just beginning to use them.
The assets of funds of funds (FOF) are growing dramatically. From a few dollars in 2000, their investments in individual hedge funds now approximate $400 billion, or about 40% of industry assets. The study predicted that the growth of FOFs will continue at a faster pace than that of individual hedge funds. For instance, the registration of US hedge fund products is growing. There were no such registrations in early 2000. Today, approximately 60 brokerage firms have registered FOFs with the SEC, the study said.
The full report is here .