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Hedge Funds to Total US$1.5 Trillion by the End of

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NEW YORK (–Although its growth is less explosive than in previous years, the hedge fund industry is still gaining ground, according to the 2003 World Wealth Report published by Merrill Lynch and Cap Gemini Ernst & Young.

The annual benchmark report found that hedge fund assets under management increased 8% over the course of 2002, bringing the total assets invested in hedge funds to US$650 billion worldwide. Researchers have predicted that the hedge fund industry will be handling US$1.5 trillion by 2010.

Still the pace of growth has slowed. The most recent statistics are a dramatic drop as compared with 2001, when assets jumped an amazing 34% Previous HedgeWorld Story.

According to the research, high-net-worth investors account for 60% of the total hedge fund assets and have driven most of the growth. That growth was lead by investors from Japan, where individuals have allocated to hedge funds to help maintain steady returns. Japanese high-net-worth investors’ pool of assets is the second in size only to that of U.S. investors, who have also been active in the hedge fund investment arena .

Wealthy individual’s prominence in the hedge fund industry may be set to slide though, according to Merrill Lynch and Cap Gemini. The report states that the “percentage held by individual investors is likely to decline as institutional investors are expected to continue to increase hedge fund allocations.”

Much of the responsibility for the hedge fund boom falls on increased demand for asset diversification driven by the poor stock market performance in recent years. According to the research, the average high-net-worth investor allocated a total of 10% to alternative investments last year. Those alternative assets may include real estate, luxury collectibles, hedge funds or any combination thereof.

“This benchmark report highlights the need for diversified asset allocation,” James Gorman, president of Merrill Lynch’s Global Private Client Group, said in a statement. “It is one way high-net-worth investors have been able to maintain their wealth during volatile markets.”

All told, the number of high-net-worth individual investors worldwide grew by 2.1% to 7.3 million people last year. The wealth of this growing demographic grew, too, totaling US$27.2 trillion, which is a 3.6% increase from the year before.

Alternative investing has proven to pay off for investors in the last year or so. For example, real estate returned 6% to 8% last year, while a fine wine index, compiled by Fine Wine Management, outperformed equities by 97% in the 2000 to 2002 period. Finally, hedge funds did well, too, with one index rising 0.2% as compared with the average equity mutual fund that lost 20.3% last year.

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