Despite the government’s insider trading case against expert consultants and hedge funds, flows to hedge funds should be strong in 2011, predicts Agecroft Partners, basing its findings on interviews with 300 hedge funds and 1,500 institutional investors. Agecroft is an alternative investments consultancy.
Agecroft expects competition from large, prominent hedge funds to decrease and all types of hedge fund investors to increase their investments to all hedge fund categories. In addition, there should be numerous hedge fund launches and increased allocations to small and medium sized hedge funds.
“In 2009 and 2010, there was a significant increase in competition within the hedge fund industry due to many previously closed hedge funds opening their funds to new assets,” Agecroft said. “After two years of the majority of assets flowing to the largest hedge funds, combined with strong performance, many of these big funds have either closed or are near capacity. The end result is less competition for assets from the largest well-known hedge funds as investors shift their focus away from investing in brand names toward managers capable of generating future alpha.”
Agecroft also expects pension plans to continue to pour money into hedge funds, as they did in 2010, looking to enhance their risk-adjusted returns.
In addition, Agecroft expects many hedge fund launches in 2011, due to pent up demand by managers wanting to launch a new fund and waiting for improved market conditions.
“With improved asset flows across most major hedge fund investor segments, many of these managers will have the confidence to finally launch their new funds,” Agecroft said. “This will make 2011 the best year for hedge fund launches since 2007. This activity will be further fueled by leading financial institutions shedding their proprietary trading desks, resulting in multiple, billion-dollar hedge fund launches.”
In addition, Agecroft expects hedge funds to focus on marketing in 2011, since there are 10,000 hedge funds competing in the marketplace. “As a result, hedge fund managers need to not only have a well-refined marketing message that effectively articulates their differential advantages over their competition, but also a professional, proactive and knowledgeable sales force able to deeply penetrate the marketplace and stay involved with investors throughout their lengthy due diligence process.
“This is very difficult for a single salesperson to achieve,” Agrecroft continued. “As a result, we will continue to see hedge funds building out their sales teams and leveraging third-party marketing firms to expand their distribution efforts.”