Two major trends are affecting the hedge fund industry: a migration to third-party administration and custody services and increased regulatory oversight, according to a new paper published by State Street Corporation. 

While hedge fund redemptions are expected to continue through 2009, according to the report, “anecdotal evidence suggests that investors are starting to regain confidence.”

In addition to the report on hedge funds, State Street’s has released a companion “Vision” paper, which focuses on private equity.

“With so much debate within these sectors as complexity has heightened over the past year, we want to help identify the actual market conditions and trends that will determine the future of hedge funds and private equity,” said Jack Klinck, executive vice president and global head of State Street’s Alternative Investment Solutions team. “The research and insights presented in these reports will help institutional investors as they make their investing decisions.”

“The hedge fund industry will emerge from the financial crisis – smaller, in terms of the number of funds, but eventually larger in terms of assets under management,” the hedge fund report states.

The other paper, “Private Equity at the Cross Roads,” notes that although the industry is currently under pressure from the financial crisis and recession, “many believe that private equity is about to enter a new phase of more sustainable growth. Over the long-term, investors and governments will look to private equity for its significant capital resources, management expertise, and high risk tolerance to help restore economic strength as impaired assets are wound down and fresh investments are required for new and expanding businesses.”

The two Vision papers draw on State Street’s extensive knowledge of hedge funds and private equity servicing. State Street’s hedge fund and private equity teams are part of its Alternative Investment Solutions group, which includes more than 2,200 employees worldwide.

With approximately $252 billion in hedge fund assets as of March 31, State Street provides servicing and management solutions for hedge funds, including recordkeeping, fund accounting, valuation, risk management and regulatory reporting.

In private equity, State Street provides full-service fund administration services to more than 400 primary funds with total assets exceeding $137 billion.