The U.S. could see a 70% decline in the number of mutual fund families over the next five years unless regulations are changed to put them on a more equal footing with hedge funds, according to a new report by the Boston research firm Celent, titled: “The Global Credit Crisis: Implications for North American Wealth Management.”

North American equity mutual funds have seen negative returns of 30% to 50% recently, and most have not shown a positive return since the Internet bubble, the report said.

Facing projections of no real returns in the next decade, many redundant mutual fund families will disappear as retirement accounts and mass affluent portfolios shift to stable value, annuities, cash and bank deposits, fixed income instruments and exchange-traded funds.

“The entire financial services sector has been mauled, causing portfolios and retirement plans to hemorrhage value while requiring investors to question such basic issues as capacity for risk and planning for their retirement,” said Robert J. Ellis, senior vice president of Celent's wealth management practice and co-author of the report.

Lifecycle funds, Ellis said, do not achieve their objectives of becoming stable as retirement approaches. Separately managed accounts and unified managed accounts are better positioned to survive a long-term market decline, and “with the exception of retirement accounts, ETFs will eventually replace index funds,” he said.

Celent projects mutual fund families will decline from more than 7,000 families to closer to 2,000 in the next five years, unless regulations are changed.

“Retirement investors have no choice but to be long based on current regs, and hedge funds and short-ETFs are able to easily arbitrage any gains away,” Ellis said. “Long-only mutual funds are sitting ducks unless the SEC or Congress change the regulations to use a new class of mutual funds in retirement accounts and ban securities lending on them.”

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