Hedge fund industry upbeat on 2005 returns

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After a year of somewhat lackluster returns, over 80 percent of the hedge-fund industry leaders, surveyed at the recent GAIM USA conference in Boca Raton, Fla., predicted hedge-fund returns would hold steady or increase in 2005, with over one-third predicting returns above 10 percent.

In addition, there was good news for investors, with over half of those surveyed (57 percent) saying they expected fees would decrease in the year ahead, according to the results of the GAIM USA/Rocaton survey conducted at GAIM USA, the largest gathering of hedge funds and their investors in the US.

With over 89 percent of respondents expecting the flow of assets into hedge funds to continue to grow, 57 percent felt that "performance mediocrity" was the greatest challenge facing their industry.

"The survey results suggest that performance remains at the top of the list of issues for all managers -- far outweighing concerns of registration, leverage or even capacity," said Amanda Rodrigues, event director and head of research for GAIM USA, a part of Institute for International Research.

The best way to obtain strong performance, however, was divided among the respondents. Results from the survey showed that nearly half, or 48 percent, said that fund of funds was the best way for new investors to access best-in- class hedge funds, while 17 percent considered direct investment as the best channel. Also highlighted was the increasingly wide variety of ways in which investors identify new managers, with 41 percent using referrals from other investors, 28 percent sourcing at industry conferences, 23 percent using capital introduction services and 18 percent using consultants.

"Interestingly, the results indicated there is no clear consensus on the way asset allocators are using hedge-fund strategies," said David Katz, founding partner of Rocaton Investment Advisors. "For example," he said, "approximately one-third, or 32 percent, view their strategies as a separate asset class, while another 13 percent utilize portfolio alpha and 12 percent consider their strategies as equity substitutes."

Results suggested the continued evolution of the hedge-fund space. While favoring global macro and CTA strategies to perform well in 2005, 43 percent and 35 percent, respectively, respondents predicted new areas as future sources of alpha, including the development of niche strategies focused on energy and insurance verticals.

What's more, only approximately one-third, or 35 percent, rated the degree of information available on hedge funds as "adequate," suggesting the need for better education and transparency.