Study: Hedge Funds to See Moderate Returns With Capital Flowing In

January 18, 2005 ( - While institutions continue to pour more money into hedge funds, investors should expect these vehicles to look and act more like mainstream - and less like alternative - investments as time goes on.

According to a recently released study from Greenwich Associates, several trends seem to be emerging despite  institutional interest in these investment vehicles.

These trends are:

  • Institutionalization, due to a large increase in institutional investors in hedge funds over recent and coming years.
  • Professionalization, due to the need to meet transparency demands and to make a profit.
  • Regulation, with Greenwich Associates predicting that some small hedge funds will bow out of the business due to the cost of compliance with SEC registration.
  • Return Moderation, which has been seen over recent years and has been explained by both a lack of volatility – which hedge funds traditionally feed off of – and an inflow of large amounts of money, which is crowding out profits in some strategies.
  • Talent Migration, which has been noticed as some of the investment industry’s biggest players move into hedge funds.

Although gross allocation to hedge funds still sits around 1% of world assets, institutions are pouring money into these funds, according to the report. In 2004, the number of Japanese institutions in hedge funds more than doubled, moving from 18% to 40% on the year. In Europe, this figure rose from 23% to 32%, while in America the number rose from 23% to 28%.

Even with this increase in institutional involvement, expectations of returns were mixed among investors. Institutional rate-of-return expectations for hedge funds declined from 2003 to 2004 in the US (8.6% to 8.3%), and Japan (4.7% to 4.2%). However, in Canada, expectations increased (7.1% to 7.4%), as well as in the UK (6.1% to 6.5%) and continental Europe (6.1% to 6.2%).