For all the headline grabbing that hedge funds and exchange-traded funds have done over the last few years, their pace of growth remains surprisingly far behind that of everyday mutual funds.
Citing data from the Investment Company Institute in Washington, Bloomberg News columnist Chet Currier reports that as of mid-2005 assets of worldwide mutual funds was $16.4 trillion, up from the $14.5 trillion during the same period last year. That increase is greater than the total $1 trillion managed by hedge funds and the $360 million in ETF assets combined.
While hedge funds have been growing faster in percentage terms, they would need to sustain their current pace over many years to catch up to mutual funds. That's highly unlikely. Besides, as long-only investment vehicles, mutual funds have several "tides on their side," Currier suggests. In short, hedge funds rely mostly on their management expertise, while mutual funds take advantage rising stock prices, the flow of dividends from stocks and interest payments from bonds.
Sure, a sustained lull in returns on stocks and bonds might slow the growth of mutual funds, but "relentless financial market weakness" would in time doom any investment product, Currier added. But, he offers this ironic caveat, too: immense size can also limit maneuverability, so a mutual fund's greatest advantage might also be its greatest risk.