Experts Predicting a Changing Year For the Hedge Fund Sector

Date: Wednesday, January 2, 2008
Author: Lenny Broytman, Risk Center

With all of the attention the troubled US housing market has garnered, it seems that an equally important market has been ignored more and more. And the market at hand is the hedge fund sector, that many experts close to the industry insist is changing at an extremely rapid pace.

According to the Wall Street Journal, funds are growing at an alarming pace, with just about 7,500 having nearly $2 trillion under management.

One of the biggest predictions for the industry at large is the simple fact that it will not stop expanding anytime soon. The Journal says that returns on funds will also continue to fall in 2008. With a multitude of investors all going after the same thing, many funds are going to be finding it harder and harder to remain competitive and beat stock-market returns. The more "institutional" fund groups, such as Citadel Investment Group, have scale that gives them the power to attract investors and stay on top of multiple markets.

The Journal also points out that returns are reportedly widely dispursed around the average and some perform so remarkably that investors will gladly open their wallets when it comes to fees. Investors are promised spectacular results and anticipate them with such a great deal of confidence, the higher fees have been becoming less and less of a problem.

The vast improvement of transparency has also been an increasingly common topic within the hedge fund sector. The Journal predicts that the industry should not really be all that concerned with regulators forcing greater disclosure as long as hedge funds manage to avoid individual or "retail" investors. Nevertheless, institutional investors and funds of funds are beginning to require quite a bit more information on the day-to-day operations of many hedge funds. In addition to this, the Journal says that the standards for much more efficient transparency will be going up, especially for publicly-traded companies.

Although many regulators are choosing to step aside for the most part and allow the hedge funds to operate under their own preferred guidelines, lawmakers are still imposing fairly high tax rates for the sector and according to expert predictions, that reality is here to stay.

Another noteworthy new reality in the hedge fund industry is that many in the sector are doing their very best to keep less-wealthy investors from entering the market. There are also predictions surfacing around the market that say many managers are looking to develop much simpler, lower-cost approaches that have the capability to replicate many fully-functioning hedge funds. For example, some say that the newly-popular 130/30 are the result of ideas derived from traditional stock fund management.