NEW YORK (HedgeWorld.com)–Putnam Lovell NBF* and NewRiver predict that hedge fund assets will grow fourfold to US$2 trillion by 2010, with U.S. and public pension plans alone accounting for US$527 billion.
In a white paper titled, "Institutional or Institutionalized–Are Hedge Funds Crazy?" the firms show an industry poised for growth and, at the same time, enormous change. The study estimates that worldwide US$800 billion of new money will flow into hedge funds this decade, almost quadrupling assets. Another US$700 billion is predicted to come from market appreciation.
Thanks to sub-par performance in traditional asset categories, the paper's authors assert that more investors will be attracted to absolute return strategies. On average this means that hedge fund assets will grow due to new allocations and performance by 17% a year.
The paper's authors expect that adoption rates of hedge funds will rise from 1.2% to 3.0% of global high-net-worth individual and institutional assets. According to NewRiver, high-net-worth investors will boost their allocation to hedge funds from the US$393 billion they had invested in hedge funds in 2001 to US$1.2 trillion in 2010.
But the area to watch remains institutional investment, which is poised to grow dramatically in a few short years. U.S. endowment and foundation allocations should grow by US$150 billion, reaching 15% of assets. Corporate and state pension fund allocations should quadruple sparking an increase of hedge fund assets by US$450 billion.
The white paper's predictions are built on a series of assumptions and previous research done on the hedge fund industry. The authors have assumed that the rate of net inflows in 2002 will equal the TASS database rate of inflow in the first half of 2002 or 7.8% of the assets at the year's start. From there, they predict a steady increase of 2.5% a year to reach the US$800 billion in inflows. Hedge fund yields are assumed to be 0% this year and 9% annually thereafter.
Despite the accuracy of these estimates and assumptions, it's evident nonetheless that with allocations from pension funds such as the California Public Employees' Retirement System, Pennsylvania State Employees' Retirement System and the entry of General Motors into the hedge fund business (Previous HedgeWorld Story) the industry is going to grow. And with that growth comes new hedge fund creation and consolidation, according to the white paper.
