SEC regulation, demand for additional transparency, and tales of occasional fraud are but speed bumps on a trajectory that could see hedge fund assets quadruple by the end of the decade,” according to a 200-page assessment just released by Cerulli Associates.
The Boston-based research firm’s Hedge Funds: The Market for Absolute Returns provides insights to distributors of alternative and traditional investment products seeking to assess financial advisors’ appetites for hedge funds and absolute return vehicles.
Cerulli (www.cerulli.com) refers to hedge funds as a “booming business” partially fueled by the bear market in equities from 2000 to 2002, and the anticipated bear market in bonds. Moreover, the report notes that although a variety of non-hedge fund alternatives such as real estate, TIPs, and energy investments have been widely popular in recent years, these investments have “significant drawbacks” and may not be such effective diversifiers due to their higher correlation with equities. In addition, they may not be as effective risk-reducers because they display greater statistical and/or fundamental risks than hedge funds.
The report rises above the more pedestrian observations and biases of some less informed studies and financial journalists that so frequently have difficulty seeing past occasional accounts of manager blowups or frauds. With refreshing insight, Cerulli acknowledges that the financial press has not been flattering to the hedge fund industry in noting that “risk reduction and consistent single-digit returns do not make for sexy stories.”
A significant portion of the study assesses the present status of the trend toward the convergence of absolute return strategies and mutual fund structures. The byproducts of this trend–mutual funds with hedging strategies, or hedge fund mutual funds (HFMFs), as the report refers to them–are noted for their popularity across RIA groups due to their familiarity and comfort with the ease of use of mutual funds, as well as the funds’ liquidity, transparency, and regulatory oversight.