Earlier this week, hedge fund research house Tremont published its analysis of fund flows covering the third quarter of 2002, showing that a net $6.8 billion was added to hedge fund assets during the period, bringing total net inflows this year to just under $17 billion. Last year's total topped $31 billion.

The Putnam Lovell study estimates that institutional investors and wealthy individuals will channel $800 billion of new money into hedge funds by 2010, and that industry assets will rise to $2 trillion. The study assumes that returns will be flat this year, but will average 9% a year thereafter, resulting in $700 billion of growth through market appreciation.

"In a world where investors have suffered three straight years of stock market losses, even anemic recent hedge fund gains are tempting U.S. pension plans and other institutions to trust their money to 'absolute return' strategies," said Joseph R. Hershberger, a Putnam Lovell NBF managing director.

The study predicts that institutions and professional investors will have an increasing impact on the sector: "The sophistication and rigor that institutional investors bring to the investment process will serve as an important catalyst for refining standards of practices," the study says.