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Hedge Fund Changes Seen within Broad Asset Management Industry Evolution

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NEW YORK (–Common distribution platforms that include hedge fund products as well as mutual funds, annuities, separate accounts and insurance are the future business model for asset management companies, according to Steven Buller, Ernst & Young’s Americas director and global co-director of asset management services.

Mr. Buller was speaking at an Ernst & Young briefing on the state of the financial services industry.

He sees these platforms as including both premium services targeting high-net-worth investors and low-cost brands for the retail sector. Hedge funds belong primarily in the premium category. But the overall setup resembles Wal-Mart, a large seller of diverse products at relatively low cost.

The risk/return profile of hedge funds is changing–in particular, they increasingly are diversifying from the long/short format to offer net long investments, Mr. Buller argued. He noted that it has become difficult for an individual manager to distinguish himself in the market as the number of hedge funds has increased from a little more than 2,000 in 1995 to approximately 7,000 this year.

Despite the difficulty of achieving returns in a crowded industry, Mr. Buller foresees ongoing expansion as far as the near future is concerned. “Expect continued sustained growth in the number and assets of hedge funds” over the next 18 months or so, he said.

Growth in traditional fund assets has stalled and hedge funds are one of the venues into which high-net-worth and institutional money has gone. Assets in hedge funds have grown from less than US$100 billion in 1995 to between US$800 billion and in excess of US$1 trillion by late 2004.

“It is going to be an interesting next few years for our industry,” he said.

Contact Bob Keane with questions or comments at: [email protected].