Total hedge fund assets could grow to $2.5 trillion in 2011

Hedge funds experienced the largest increase in assets in history in
the fourth quarter of 2010, growing by $149 billion to $1.917
trillion, according to Hedge Fund Research.

This fourth-quarter increase surpasses the previous industry record
of $140 billion in the second quarter of 2007.
Kenneth Heinz, president of Hedge Fund Research, says if the industry
sees record levels of growth, total hedge fund assets could reach $2.5
trillion by the end of 2011. A more conservative estimate would be
$2.1 trillion, he said.

Total net new capital of $13.1 billion was allocated to hedge funds in
the fourth quarter of 2010. This, said Heinz, demonstrated continued
interest from new investors in the hedge fund industry.

The increase in launches in 2010 of hedge funds and funds of funds
(FoHFs) is set to continue into 2011, according to Heinz. From 2009 to
2010 an estimated 192 hedge funds and FoHFs were launched, rising from
9,045 to 9,237.

"This trend is certainly supportive of additional launches and fewer
liquidations. I would add that the proliferation of Ucits III vehicles
is supportive of the trend towards new launches for hedge funds,"
Heinz commented.

Ucits hedge funds, he said, will play an important role for hedge
funds in 2011, continuing their "pervasive" run on the industry.
Heinz said the popularity of Ucits hedge funds will continue because
of their "very salient appeal to retail investors".

However, he warned the trend may be limited by the fact that many
strategies and funds cannot adhere to the strict Ucits rules on
liquidity, leverage and types of instruments allowed to be used.

Heinz said he does not expect a sudden shift by the industry away from
Cayman-domiciled hedge funds. Although some funds have redomiciled
away from the Cayman Islands, he said "the speed of the shift is as
fast as people may think… and may not transform the industry in the
short term."

In terms of the type of funds investors may choose to allocate to,
Heinz said: "At the beginning of the year [2010] there was a
meaningful concentration of new asset inflows into hedge funds with
greater than $5 billion of assets. In the first quarter 100% of
capital inflows went to companies with greater than $5 billion. In the
fourth quarter this was 50%. It's not that people have stopped
delegating to larger funds, more that that trend moderated by the year

He admitted that investors have conditioned expectations of returns
for larger hedge funds due to their long-term historical average. By
contrast smaller hedge funds potentially offer more exciting returns
for an ambitious investor.

In term of management and performance fees, Heinz said there may be a
rise in funds offering trade-offs in terms of management and
performance fees and lockups. Certain funds could start to offer no
lockup in return for increased fees or an incentive fee accompanying a
two-year lockup, he said.
Source: HedgeFundsReview.Com