The hedge fund industry is facing a transformational crisis. For firms to survive, they have to address key shortcomings. If they do, they represent the future of active asset management. This is a key theme in a new report from the US consulting firm Casey- Quirk, which provides research and advice on the funds management industry. Ben Phillips, a partner in the Bostonbased firm who was a former research head at Cerulli Associates, oversaw the report and is scheduled to talk about it and other trends on a visit to Australia early this month.

The report, which was compiled in association with BNY Mellon, is basically very bullish for the hedge fund industry. It predicts that funds under management will rise from the bottom, this year, of about US$1 trillion to US$2.6 trillion by 2013. It says that institutional investors have represented less than 20 per cent of the massive redemptions from hedge funds over the past two years, and will make up the bulk of the future growth in funds under management, especially in the US, in the next few years.

“Institutions
are committed to hedge fund investing … North American institutions will be the
greatest source of institutional net flows into hedge funds between now and
2013.” The report says that successful hedge funds will rebuild their operating
models. Managers will have to invest in robust systems, processes and controls and
rely on third parties for key administrative and operational activities. “The
enduring firm will be built upon a foundation of strong alignments. Hedge funds
have to restructure fee models, liquidity terms and compensation, and align
client requirements with business needs across four functional areas:
management, operations, distribution and investments.”

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