Hedge funds will take in record net new assets in 2012, predicts consultancy Agecroft Partners, based on interviews with more than 2,000 institutional investors.

In fact, most major hedge fund investor segments are likely to kick their investments up a notch, with increased scrutiny on relative performance, Agecroft says. Well-known brands on the one hand, and nimble small and mid-sized managers on the other, are likely to be the biggest beneficiaries of hedge fund money in motion.

Other predictions: more ’40 Act hedge funds-of-funds, more closures as well as launches and greater investor scrutiny on risk management.

The biggest contributor to growth in 2012? In their avid search for risk-adjusted returns, pension funds.

“We are in the middle of a 10-year trend during which we will see an increase in the number of pension funds allocating to hedge funds, along with an increase in the average percentage allocation,” said Agecroft Chairman Don Steinbrugge.

“Historically, many pension plans started with an investment in funds-of-funds, followed by investments directly into the largest well-known hedge funds,” Steinbrugge added. “They then focused on alpha-generators and finally evolved into the endowment fund best-in-breed strategy of investing. More recently, some of the larger pension funds have begun to skip the first step of investing in funds-of-funds by investing directly in hedge funds. This will have long-term implications for the hedge fund-of-fund industry.”

Thus, as more institutional investors and large family offices have begun to invest directly in hedge funds, consulting firms have seen their hedge fund assets under advisement “balloon in size,” Agecroft said.

 “In conclusion, Agecroft Partners expects 2012 to be a very good year for raising assets in the hedge fund industry,” Steinbrugge said. “The managers that are successful growing their business will be those that rank well across multiple evaluation factors, have a high-quality marketing message and strong distribution capabilities. The hedge fund industry is moving toward a period of sustained growth driven by institutional investors that will increasingly adopt a more institutionalized process for evaluating hedge fund managers.”

Lee Barney writes for Money Management Executive.