Most hedge funds said pensions would be their primary source of capital by 2020.

Change is transforming the hedge fund industry, affecting product mixes and fee structures, markets and investor types, according to a report released Thursday by KPMG International, the Managed Funds Association and the Alternative Investment Management Association.

The report incorporated the views from an online survey of more than 100 hedge fund managers of sizes ranging from less than $500 million to more than $1 billion and representing approximately $440 billion of assets under management.

Eighty-four percent of respondents identified themselves as single fund managers and 16% as fund-of-funds managers.

The report said the hedge fund industry’s growth today was being driven largely by institutional investors rather than high-net-worth individuals. 

A majority of managers surveyed expected a significant shift in their primary sources of capital by 2020, with most saying it would come mainly from corporate and public pension funds.

Public pension funds and sovereign wealth funds together will account for at least a quarter of capital inflows into hedge funds by 2020, the report predicted.

“The days of hedge funds simply being an investment tool for high-net worth individuals are over,” said MFA’s president and chief executive Richard Baker said in a statement.

“Institutional investors like pension plans, university endowments and charitable organizations now make up nearly 65% of the industry’s assets. These diverse partnerships help local economies and underscore the important role alternatives play at both the macro and micro levels.”

Forty-six percent of managers said they would either alter their fund strategy or launch new products to attract capital from pension funds over the next five years.

Nearly two-thirds of managers said they had seen increased demand for custom solutions from their investors. 

In fact, about half said they already offered a “fund of one” or managed fund solution, and an additional 21% said they intended to do so within the next five years. 

Custom solutions bring more customized fee structures. Some two-thirds of managers said they anticipated using specialized fee structures as a means of attracting investment. 

Geographically, most capital invested in hedge funds still comes from North America and Europe, the research found, but the greatest percentage increases in inflows are coming from Asia/Pacific, the Middle East and Africa. 

Forty-three percent of managers expected to change the markets they invested their capital in, while 21% said they would invest in the emerging markets and 7% in the frontier markets.

Increased cost and complexity associated with running a hedge fund management firm will limit growth of the industry over the next five years, the report said.

More than 75% of those surveyed said the number of hedge fund managers would decrease or stay the same by 2020.

A big majority of respondents pointed to regulation as the biggest threat to growth of the hedge fund industry.

This was particularly the case in Europe and Asia/Pacific, where more than 80% of managers cited regulation as the biggest threat to growth, compared with two-thirds of managers in North America.