Hedge funds will reorganize following sharp declines last year and into 2009 to emerge stronger and top $2.6 trillion in assets by 2013, predicts The Bank of New York Mellon and Casey Quirk.

The firms believe that hedge funds will bottom out at $1 trillion this year, after which capital appreciation and $800 billion in net inflows will push global levels to $2.6 trillion by 2013.

Only 20% of assets in hedge funds are those of institutional investors, the firms found, and that is bound to increase to possibly as much as 40%, led by pension plans in North America, followed by the U.K. and Northern European institutions. The remaining 60% of assets in hedge funds will be those of high-net-worth individuals.

The most popular type of hedge fund will be hedge funds-of-funds, which will capture 60% of net inflows between 2010 and 2013, according to the two companies.

At the same time, the industry is facing a “transformational crisis” and will turn to third parties for administrative support, The Bank of New York Mellon and Casey Quirk say.

“The events of 2008 have changed the old dynamic,” said Brian Ruane, executive vice president of alternative investment services at The Bank of New York Mellon. “Investor and regulatory demands for new levels of transparency mean the legacy operating model no longer works. Hedge funds increasingly will turn to independent third parties for middle- and back-office functions, such as portfolio accounting and reconciliation, custody of non-collateral assets, pricing and valuation, cash management and counter-party risk mitigation.”

 

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