"We believe that these projections are conservative," stated George Van, Chairman.

He continued that:

"Demand for hedge funds is at unprecedented levels and the worldwide capacity for hedge funds is growing. It took the mutual fund industry 66 years to attain $1 trillion in assets. It has taken hedge funds ten years less to reach the same level.

"Mutual funds grew more than fourfold in the seven years between 1990 and 1997, after they had reached $1 trillion in assets. Hedge funds are in the same growth mode. While they currently are private investments, hedge funds will become public securities in various forms. This will accelerate their growth."

Van explained that hedge fund industry growth is driven by a fundamental fact: hedge funds produce better risk-adjusted returns than traditional, long-only investments.

"Ask the long-time sophisticated hedge fund investors such as Harvard, Yale, the University of Virginia, large family offices and Swiss banks whether they agree that hedge funds produce better performance. Ask also the many institutions that are now investors in hedge funds because their long-only investments plummeted up to 40% in the recent bear markets while hedge fund investments preserved capital. The hedge fund industry has grown steadily for 17 years. While it will take at least another year for it to fully digest recent massive capital inflows, growth will then again accelerate,” he observed.

Van believes that demand will continue to grow for hedge funds because performance will improve and because the industry has reached its “tipping point” where capacity is expanding to meet demand. Hedge funds are also implementing new strategies and entering new sectors such as energy, private equity, real estate, middle market lending and asset-backed finance.

The industry is also expanding its reach into new markets in both developed and emerging economies, including Canada, Europe, Japan, Brazil South Africa, Hong Kong, Singapore, Taiwan, and Korea. China and India will also add substantial capacity, the report noted.

The study said that perceived obstacles to growth in the industry, such as high fees, low liquidity, low transparency, and leverage, will not impede growth. Indeed, according to VAN, the use of leverage in the hedge fund industry is a lot less prevalent than commonly thought. The study found that, as of year-end 2004, 20% of hedge funds used no leverage whatsoever while another 50% used leverage of less than one time their equity, including short positions.

Nor will the requirement to by hedge funds in the US to register with the SEC impede hedge fund growth, says VAN. This is because the rewards of even a moderately successful hedge fund will vastly outweigh the new compliance costs.

The report also pointed out the increasingly prominent role of funds of funds ("FOFs") which 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 report forecast that the growth of FOFs will continue at a faster pace than that of individual hedge funds.

According to the report, the increasing proliferation of hedge funds and their growing use by smaller investors will force the inevitable: in coming years, the majority of hedge fund products will be public vehicles.

Van concluded that: "Hedge funds are emerging from a difficult period that has been caused by positive reasons: their outperformance and the resulting high demand. For the most part, existing hedge fund strategies are adjusting to unprecedented demand. New strategies are meeting with success, both in traditional markets and elsewhere. Industry assets will increase dramatically in coming years."