All the industry executives interviewed shared Mr. Mindich's vision of how the hedge fund industry will look in the future.
"Institutional investors want to deal with institutional hedge fund managers with expanding businesses, a global footprint, diversified sources of alpha and very robust infrastructure. The big players will continue to get bigger, although investors will (also) want to access interesting, smaller hedge fund managers," said Colin Smith, chief executive and chief investment officer, Deephaven Capital Management LLC, Minnetonka, Minn. Deephaven manages more than $3 billion in multistrategy hedge funds.
Three large, global money management firms intend to take advantage of the trend toward big institutional firms: Tribeca Global Investments LLC and Lehman Brothers Absolute Return Strategies, both in New York; and Man Group PLC, London.
Tribeca CEO Tanya Styblo Beder, who started the multistrategy hedge-fund firm in June 2004 for New York-based Citigroup Alternative Investments, predicted that the number of hedge funds today — about 9,000 — will likely be reduced "by a factor of a few thousand." She also envisioned fees, probably with hurdle rates introduced.
Ms. Beder sees continued growth in hedge fund assets, saying: "Once the big institutional investment platforms are in place, pension funds and other institutions will be in a position to give as much as $500 million, for example, to a single manager. I've always thought that this size limitation on single mandates was the reason managers have been unable to satisfy institutional demand."
Tribeca executives expect to meet the target of their growth plan — to manage between $10 billion and $20 billion by 2011. Tribeca manages $1.8 billion, all for institutional investors.
Jolyne Caruso, managing director and global head of absolute-return strategies at Lehman Brothers Absolute Return Strategies, said her unit now manages $6 billion in a combination of single-strategy hedge funds and hedge funds of funds for institutional and high-net-worth investors. Lehman ARS will continue to take minority ownership stakes in early-stage hedge fund managers, Ms. Caruso said. The firm already has three such stakes, and "that gives us a good window into the hedge fund industry. We're watching closely as hedge funds morph their businesses," Ms. Caruso said.
The hedge fund industry is 18 months into an important transition period which has been characterized by challenging market returns, she noted. "The industry has crossed the $1 trillion mark, institutional money is coming, and I think we are only in the top of the sixth inning in hedge fund evolution. It's not over yet."
Ms. Caruso predicts a doubling of hedge fund assets during the next five years because "the wave of institutional investment is just beginning. So many institutions have only a 2% or 3% allocation, and this will definitely increase."
The world's biggest hedge fund manager is Man Group, at $54 billion. Man Group manages hedge funds of funds, single-strategy and multistrategy hedge funds, and structured and guaranteed strategies for institutional and high-net-worth investors.
Man Group CEO Stanley Fink is also confident that industrywide, hedge funds will continue to grow by about 15% annually over the next five years, a little slower than the 20% average yearly industry growth over the past 10 years.
He foresees a good pace of growth in the United States, although not as good as in Europe, especially in the U.K. Also, "coming up will be Asia, especially Japan. There is really enormous demand globally, but especially outside the U.S. as less developed markets begin to offer derivatives and other financial instruments," Mr. Fink said.
He also predicted a plethora of fresh investment strategies, mainly variations on global macro, using many of the newly minted derivative instruments.
Man Group's assets are expected to grow at the same pace as the market, doubling over five years, as the company capitalizes on its strong global distribution, robust infrastructure, and clear branding, Mr. Fink said. (Man Group owns several investment subsidiaries with well-known names such as Chicago-based Glenwood Capital Investments LLC.)