Fat Hedge Fund Returns Not Likely to Continue

Hedge funds are unlikely to keep up with their gains of the past, according to a new study by Greenwich Associates. The study, released Tuesday, said that increasing assets, an abundance of new managers and a limited number of trading opportunities could restrain hedge fund performance this year.

The virtually unregulated investment partnerships accounted for 82% of trading volume in U.S. distressed debt markets in 2004; 70% of U.S. trading in exchange-traded funds; and more than half of the listed and vanilla OTC options contracts trades in 2004, the Greenwich study noted.

Some U.S. institutions such as pension funds and endowments already foresee weak hedge fund performance, which was the case in the first nine months of 2004. Specifically, these groups expect hedge funds to return, on average, 9.1% a year going forward. Institutions in Japan, the U.K., Europe and Canada expect even lower gains.

The Tremont/CSFB Hedge Fund Index, which has measured industry performance since 1994, has risen 11% a year during that time.

Expectations of lower returns will hardly discourage institutional investors, though, Greenwich contended. Hedge funds, which are luring managers and traders away from mutual fund firms, are likely to see significant investments, the study showed.