Hedge funds are on the rise and making it into the mainstream, according to the latest survey from the Hennessee Hedge Fund Advisory Group. The 11th annual Hennessee Hedge Fund Manager Survey found that hedge fund assets have soared 27% in just one year, from $795 billion to more than $1 trillion.

Most of that growth came from new money (17%), while positive performance also played a significant role (10%). In addition, the number of offerings went up 15%, from 7,000 to 8,050.

This type of growth indicates that hedge funds have graduated from being a sideline offering for only the most sophisticated investors to a much more mainstream product, said E. Lee Hennessee, managing principal of the New York-based Hennessee Group.

"Hennessee Group has been monitoring hedge funds since 1987 and the growth [the industry has] experienced indicates that hedge funds have matured to an accepted asset class," he said.

One challenge created by the growth of the industry is that hedge funds will run into a shortage of stocks and bonds to borrow as part of their short hedge ratios, said Charles Gradante, managing principal at Hennessee Group.

"Consequently, the use of derivatives to hedge will likely increase as the industry grows going forward, a situation which will change the industry's landscape," Gradante explained.

The survey also discovered that hedge funds traded more frequently in 2004 than in the previous year, on average turning their portfolios over 3.35 times, as opposed to 2.99 times in 2003. Fees are also on the rise, with 53% of managers charging more than 1% as an annual management fee, versus 41% in 2003.

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