Institutional investors' appetite for hedge funds will dramatically increase causing
significant structural and operational shifts according to a new study.
The study released this week by The Bank of New York and Casey, Quirk & Acito LLC. is entitled "Institutional Demand for Hedge Funds: New Opportunities and New Standards."
It found that US institutional investors' capital for hedge funds could increase from its current USD 60 billion to USD 300 billion by 2008. Defined benefit pension plans are expected to represent the fastest growing source of institutional capital as investment policies and legislative changes facilitate new hedge fund strategies.
Brian Ruane, executive vice president at The Bank of New York, said: "The increasing influence of institutional investors in alternative investments and particularly hedge funds will dramatically change the way firms operate and define success. Successful hedge fund firms will have to balance investment excellence with business, operations and client service acumen if they expect to attract a meaningful share of this capital."
According to the study, institutions will place a greater emphasis on lower volatility and risk as more capital flows into hedge funds. Institutions will also lower their return objectives to a relatively modest 8% annually.
The study also found that funds of hedge funds will maintain their current 50% share of institutional capital with little evidence that institutions will eventually favor total direct investing into individual hedge funds.
Chris Acito, principal of Casey, Quirk and Acito, said: "Interestingly we found that managers of funds of hedge funds are beginning to serve in a more consultative capacity with institutional investors - they are counted on as trusted overall advisors, providing manager search, strategic and tactical asset allocation guidance, and risk monitoring."
The study defined several attributes that will characterize the hedge fund firms best able to attract institutional capital, noting that many will be severely challenged by institutional investors to meet new stringent professional requirements.
"A great many of today's hedge fund managers are unlikely to be able to meet the new requirements of institutional investors," said Ruane. "That suggests a shakeout in the industry moving forward with the next great generation of hedge fund firms only starting to emerge."
Results from the study were compiled from one-on-one interviews with over 50 leading US and European institutional investors and hedge fund managers, primary survey research of more than 80 institutional investors and hedge fund managers, and using secondary sources to create a database of 400 US institutions identified as currently making hedge fund investments.
Background Note: Casey, Quirk & Acito LLC (CQA) provides management consulting services exclusively to investment management firms. CQA specializes in developing business strategy and planning, enhancing investment practices, and crafting distribution policies. CQA draws on 35 years of experience in delivering value to its clients and partners through a unique combination of deep industry knowledge and experience, solutions-oriented thought leadership, and a proven ability to create change within organizations.