Hedge funds market to hit $1t

Date: Tuesday, December 12, 2006
Author: The Gulf Today

THE global institutional investor capital in hedge funds will increase from around $360 billion to over $1 trillion in 2010, according to a leading financial institution.

Institutional investors will account for more than 50 per cent of the total flows into hedge funds through 2010. Retirement plans will represent 65 per cent of total institutional flows through 2010, The Bank of New York said in its latest report released on Monday.

"Today's hedge fund techniques will be tomorrow's mainstream investing. Alternative investing has impacted institutions fundamental investing philosophy -- institutions' interest in and appreciation for less constrained, absolute return-oriented investments is gradually extending to other parts of their portfolios."

The bank expects institutional investors to gravitate to the "dual approach" model. Many investors will employ both fund-of-hedge funds and direct hedge fund allocations to implement their hedge fund programmes. "We estimate that institutional allocations will be split nearly 50-50 between fund-of-funds and direct investing by 2010."

"Institutional quality" competitors will dominate, which includes traditional firms managing hedge funds, strong multi-product hedge fund firms, and fund-of-hedge fund firms with improved advisory skills that will emerge as trusted advisors. Operational excellence and comprehensive risk oversight are among the key drivers of hedge funds.

However, hedge funds' biggest challenge is meeting clients' performance requirements, the bank said.