Institutional demand for hedge funds to reach $1 trillion by 2010

Worldwide institutional demand for hedge funds will reach $1 trillion by 2010, according to a survey of institutional investors conducted by Bank of New York and Casey, Quirk and Associates, a Connecticut-based investment consultancy.

That means institutional demand for hedge funds will have tripled in four years’ time, from $360 billion this year. Brian Ruane, executive vice-president of Bank of New York, said: “Broadening acceptance of alternative investments, coupled with lower expected returns from traditional investments [is] driving demand for hedge funds among global institutional investors.”

The study also claimed that by 2010, 25% of all institutional investors will be putting money into hedge funds, up from 15% now. It found pension funds will be their largest contributors in four years’ time, with US schemes accounting for the biggest percentage growth.

Kevin Quirk, a partner at Casey, Quirk and Associates said that in future institutions would have to generate greater returns and be more comfortable with concepts such as shorting, derivatives and leverage. “The study shows that today’s hedge fund techniques will be tomorrow’s mainstream investing,” he said.

The survey also claimed that as their techniques become mainstream, funds will be required to compete more vigorously in areas such as operational excellence, risk oversight and fee structures. However, it warned that underperformance, scandals or regulation could all slow predicted growth.

The study was based on more than 100 interviews with institutional investors, investment consultants, hedge funds, fund of hedge funds, and industry experts around the world. It follows up on a similar one conducted by the two firms in 2004.