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The Fund of Hedge Funds Industry

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2003/09/03

Abstract

Celent predicts that the fund of hedge fund industry will sustain growth of at least 17% for the next 3 years as institutions and individuals take greater interest in hedge fund portfolio management.

The fund of hedge funds industry has grown dramatically in recent years, now controlling US$81billion in assets. This growth has been driven by the sheer number and diversity of individual hedge funds, coupled with the complication of hedge fund portfolio management. In a new report entitled, "The Fund of Hedge Funds Industry,"Celent analyzes the business model and growth opportunities for the fund of hedge funds industry.

The fund of hedge funds industry is riding the crest of two major market trends. The first is the interest of institutional investors in hedge fund investments. The total quantity of institutional assets in hedge funds is rising, as are the number of institutions making investments. The second is the general public’s tremendous interest in hedge fund investments. This interest has led traditional asset managers to offer hedge fund products, and hedge fund managers to partner with traditional financial distribution channels to access individual assets.

In an increasing number of countries, financial regulators are relaxing their restrictions on individuals investing in hedge funds. Funds of hedge funds are receiving special attention, as these firms are seen as the alternative asset industry’s equivalent of mutual funds. In Ireland, Hong Kong and Singapore, specific regulations now exist for fund of hedge fund managers and investors. In the United States, some funds have chosen to register with the SEC, essentially making the argument that, for all intents and purposes, their activities are no different from a traditional mutual fund.

"A greater public understanding of hedge fund products will drive the growth of the fund of hedge fund industry, though capacity constraints will hold it back," comments Octavio Marenzi, managing director of Celent and co-author, with Josh Galper, of the report. “Investor demand will outweigh downsides, but smart hedge funds should look to the mutual fund industry for strategies on technology and operations.”