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Portfolio > Alternative Investments > Hedge Funds

HVB Report: Expect Growing Hedge Fund Concentratio

By Staff Writer

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MUNICH, Germany (HedgeWorld.com)–An “activity report” published by the alternatives unit of HVB Group identifies a number of major trends in hedge funds, both on the investor and the manager side of the industry.

“Hedge funds will become mainstream within the financial services industry, because they introduce a compelling new money management paradigm,” wrote Rudolf Nemetschke and Alexander Schweickhardt, members of the board at HBV Alternative Investment AG, in their introduction to the report. “The traditional and alternative asset management industries might merge.”

They argue that concentration will become a dominant force as the industry matures because larger firms with deep infrastructure are better able to meet the standards of institutional investors. Another study has found that the critical asset size for a hedge fund of funds is US$1 billion. The minimum necessary for success is growing and by late 2003 could be up to US$2 billion.

About 60 funds of funds have more than US$1 billion under management. “Most companies below this level will face difficulties to gain access to institutional investors,” Messrs. Nemetschke and Schweickhardt wrote. “This is due to the approach of consultants who focus on infrastructure, risk management systems, reporting capability, management depth and financial stability.”

Other highlights from the review:

  • Most new products will struggle for capital and smaller firms will have the most difficulty.
  • A more supportive regulatory environment is expected in Europe. “The hedge fund industry and regulators are currently on a convergence path.”
  • European authorities are likely to deregulate retail hedge funds. “Consultants are receptive and increasingly recommend structured products.”
  • Increased use of collateralized fund obligations will add to liquidity and investor appeal.
  • European and Asian managers account for a growing share of the industry.
  • Demand from institutions continues to increase and could outweigh private investors within five years.
  • Large financial companies will continue to seek funds of funds for acquisition.

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