Hedge Funds To Top $1 Trillion By 2004

by Carla Johnson, Investors Offshore, London

21 June 2002

The boom in hedge funds will continue, according to a new report issued by Boston-based Financial Research Corporation, and hedge fund assets are likely to top one trillion dollars by 2004, having reached $550bn by the end of 2001. Even $1 trillion would represent only 4% of global investible wealth, however; and many analysts doubt whether the hedge fund as it has developed can sustain its contrarian edge as it becomes a mainstream instrument.

What is a hedge fund, anyway? FRC defines a hedge fund as a liberal, unregulated, risk-adjusted version of a mutual fund, with an absolute-return strategy, and says in its report that the number of hedge funds will increase to more than 9,000 by 2004, with the growth driven by fund-of-hedge-funds. FRC estimates that a net 645 new fund-of-hedge-funds and 565 single-strategy funds will be introduced over the next two years.

Hedge funds are benefiting from the perception that plain vanilla mutual funds are failing to deliver adequate returns while equity markets stagnate. "Given that redemptions outpaced sales of Canadian mutual funds for a second straight month in May, manufacturers in Canada should be looking past the mainstream product offerings into more specialized investment vehicles to retain assets," says David Enns of Credo Consulting Inc., FRC's joint marketing partner in Canada.

FRC says that there is, however, a growing trend among hedge funds to try to cater to less wealthy clients by promoting more accessible products such as fund-of-hedge-funds. And more and more funds are registering with the Securities and Exchange Commission in order to bring down the minimum investment requirements to attract smaller investors. Standard investment minimums in hedge funds have come down to $250,000 or even $100,000 from $500,000 to $1 million in the past. And as mutual-fund companies create hedge funds specifically to attract the lower levels of wealth, there are now funds with investment minimums of $25,000 to $50,000.

Some of the key findings of the FRC study include:

• Funds-of-hedge-funds are becoming the product of choice for advisors catering to high-net-worth investors, and the offering well suited for more down market clients as well;
• New entrants into the hedge fund industry today are in such a rush to be the first to market their product that they often find that they have not laid the right foundation for their offering;
• Proceed with caution. If a manufacturer believes that it has all the resources, infrastructure, technology, administrative support, and business plans required to achieve a successful hedge fund product launch, then the firm is probably less prepared than it realizes.

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