Institutional demand for hedge funds to rise to $1 trillion

By Neil Behrmann

Global pension funds and other institutions will have invested US$1,000 billion in hedge funds by 2010 compared with US$361 billion at the end of 2005.

This is the prediction of The Bank of New York and Casey, Quirk & Associates, an American pensions consultant, following interviews with more than 100 retirement plans and other institutions and managers.  Their paper, "Institutional Demand for Hedge Funds: A Global Perspective" estimates that cumulative institutional flows into hedge funds will be about US$510 billion from the end of 2005 through 2010.  Including annual compound appreciation of around 8.5 per cent, their hedge fund investments will reach US$1 trillion, the researchers estimate.

Currently hedge funds only account for around 2 per cent of global institutional assets, amounting to around US$18,000 billion. US and Canadian institutions hold the bulk or 41 per cent of global institutions' hedge funds followed by Japan, 25 per cent, continental Europe, 11 per cent, the UK, 8 per cent, Middle East 8 per cent, Australia, 2 per cent and "other", mainly Asian institutions excluding Japan, 5 per cent.

Pension fund investment in hedge funds will continue to grow, despite the mammoth US$6 billion losses of the US hedge fund, Amaranth, contends David Aldrich, head of securities banking, The Bank of New York. Mr Aldrich who interviewed several pension managers  maintains that the Amaranth debacle will encourage institutions to demand more transparency from hedge funds and will choose those funds that produce steady non volatile returns rather than risky strategies. Institutions will also require tighter risk controls and operational excellence when they choose hedge funds, he believes.

In Japan , primarily banks and insurance companies have invested in hedge funds so far.  The paper foresees new flows into hedge funds coming from Japanese corporate pension plans. Mr Aldrich added that it was difficult to obtain hard data from retirement plans and other institutions in the rest of Asia . But from anecdotal reports Asian pension fund investment in hedge funds is increasing, he says.

Of the forecast cumulative institutional flows between 2006 and 2010, 65 per cent are predicted to be retirement plans, 15 per cent endowments and founOctober  15 per cent government institutions and 5 per cent banks and insurance companies. By 2010 institutions investing in hedge funds will increase to nearly 25 per cent of all institutions, up from 15 per cent today

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