Once considered a niche product for the high-net-worth, hedge funds have become the vehicle of choice for an increasing number of investors, prompting some observers to wonder whether the industry's stellar returns are a thing of the past, according to a CBS Marketwatch report.
Hedge funds, largely formed as offshore partnerships, are designed to generate gains no matter which direction the market takes using a variety of strategies such as short selling and trading in derivatives.
These investments are now showing up in a growing number of pension funds and endowments and have become one of the many menu choices financial advisers recommend to the mass affluent.
As of the end of September, hedge funds took in $107 billion so far in 2004, sending total assets under management above the $900 billion mark, according to Tremont Capital Management, a Rye, N.Y., consulting and research firm that tracks more than 5,000 hedge funds.
Institutional investors were the driving force behind that growth as CalPERS, the nation's largest pension fund, doubled its hedge fund investments this year to $2 billion.
Given the recent trend of hedge funds becoming more mainstream, some observers fear a capacity crunch, the report said. The concern is that as new assets continue to pour into the industry, returns will as more money chases a limited number of investment ideas.