With the hedge fund industry continuing to bleed assets, it may seem absurd optimism to predict huge inflows. But that’s just what a new report promises over the next four years.
The Bank of New York Mellon and Casey Quirk & Associates report estimates that hedge funds will manage $2.6 trillion by 2013, buoyed both by investment returns and $800 million in net inflows. Many hedge fund databases estimate that the industry has already dropped below $1 trillion in global assets; the BNY Mellon-Casey Quirk report, “The Hedge Fund of Tomorrow,” expects hedge funds to bottom out at about $1 trillion this year.
Institutional investors will be the biggest contributor to the hedge fund renaissance, according to the report. Institutions were responsible for just one-fifth of hedge fund redemptions between last year and this one, and the report identifies North American and Northern European pension plans as the largest source of new capital between 2010 and 2013.
Still, hedge funds’ longtime bread and butter, high net-worth investors, could account for up to 60% of inflows during that period, depending on capital market conditions and hedge fund performance.
The report also details the changes in the hedge fund industry, noting that, in order to survive, hedge funds must become more transparent and liquid, with a growing reliance on third-party administrative support.
“The events of 2008 have changed the old dynamic,” Brian Ruane, executive vice president of alternative investment services at BNY Mellon, said. “Investor and regulatory demands for new levels of transparency mean the legacy operating model no longer works.”
“Enduring hedge fund management firms will more closely align their business models with investor needs for transparency and liquidity,” Kevin Quirk of Casey Quirk added. “This means new fee models and longer-term incentive structures.”
According to the report, four types of hedge fund firms are likely to weather the current storm and thrive in the years to come: single-strategy boutiques, multi-capability platforms, merchant bank alternative managers and converged traditional-alternative managers.