Combined hedge fund assets–including single-strategy hedge funds and funds of funds–will increase at a compound growth rate of 15% between 2005 and 2008, resulting in overall growth of 75% during this period, according to new research by TowerGroup.
While hedge fund assets will experience significant growth going forward, the number of hedge funds will remain flat, TowerGroup predicts. “Growth in the number of hedge funds will slow to a compound annual growth rate of 1% through 2008,” the study said, which will be the result of a slight increase in the fund attrition rate–currently at 5%–coupled with a decline in the number of new entrants due to increased SEC oversight.
New SEC Chairman Christopher Cox told The Wall Street Journal in a recent interview that he supports hedge fund manager registration with the securities regulator.
TowerGroup expects hedge funds to become more mainstream as “institutions increase allocations to alternative investments, funds of hedge funds proliferate, and new retail investment products lower the barriers to hedge fund entry.” TowerGroup says the changing client profile of the hedge fund market, along with its significant growth trajectory, will provide new opportunities and challenges for service providers. “The changing client base of hedge funds, their use of multiple prime brokers, and increasing regulation by the SEC are all driving demand for better technology and transparency,” says Matthew Nelson, analyst in the Investment Management research practice at TowerGroup and author of the research. “Fund administrators must quickly broaden their technology capabilities and service offerings to keep pace. At the same time, battles lines are being drawn as prime brokers push into hedge fund administration and global banks acquire traditional fund administration providers.”
By 2008, as hedge fund assets top the $2 trillion mark, TowerGroup expects more than $2.5 billion to be spent annually on hedge fund administration services.
TowerGroup has issued three reports in a hedge-fund focused series: “Hedge Funds Go Mainstream: Is it Time for Service Providers to Pop the Cork?”; “The Changing World of Hedge Funds: Implications for Fund Administrators”; and “Prime Brokers” Providing the Choice Cut Services Au Jus.”