Hedge fund assets may bottom out this June: report

NEW YORK/LONDON (Reuters) - Hedge fund assets under management will hit a nadir of $1 trillion by the end of the second quarter before rebounding to $2.6 trillion by 2013, an industry report predicted Monday.

An industry study by Bank of New York Mellon (BK.N) and Boston-based research firm Casey Quirk also estimated that 60 percent of new funds over the next four years will go to funds of hedge funds, investment products designed to spread risk and diversify exposure.

Hedge fund assets fell to $1.4 trillion at the end of 2008 from a record $1.9 trillion at the end of 2007, according to data from Chicago-based Hedge Fund Research Inc.

The industry suffered record outflows of $150 billion in the fourth quarter as investors became increasingly risk averse and were forced to meet cash needs.

BNY Mellon and Casey Quirk said demand for hedge funds will remain strong, while industry reforms will help restore confidence and predicted that the outflows would stop by June.

"Once we move through this cycle, redemptions will bottom out and the hedge fund industry will be set to grow again," Marina Lewin, head of business development for BNY Mellon's alternative investments, told Reuters. "These hedge fund strategies are a critical piece of institutional investor portfolios."

Some 81 percent of investors are expected to put their money into hedge funds, the report said, based on interviews with 158 people working for institutional investors, consultants, family offices, prime brokers and others industry players.

U.S.-based institutional investors are expected to be the largest source of inflows through 2013 after providing large net inflows in both 2008 and 2009, the report said.

European high net worth individuals have been the biggest source of outflows so far, the report said, while redemption rate among Asian high net worth investors was over 30 percent.

In both these cases, redemptions were driven by structured notes with automatic redemption triggers. In the United States, where structured notes are less common, the rate of redemption from wealthy investors is likely to remain in single digits, the report said.

"The money will want to come back. These clients are not equity investors: they invest in property and bonds and they seek access to other assets in a hedged fashion," said Casey Quirk consultant Daniel Celeghin said in an interview.

Amid some of the toughest markets ever, 80 percent of redemptions came from individuals, compared with a 17 percent rate among institutions such as pensions, the report said.

Celeghin said asset growth depends on healthier financial markets that can expand the world's pools of wealth. In a bearish scenario, assets under management may climb to $2 trillion while in the bullish case, assets could soar to more than $3 trillion, he said.

There are a number of wild cards. Low oil prices could limit investment by Middle East sovereign funds.

Not all funds will bounce back.

"Many managers kept their doors open. They felt investors were entitled to their money. They had a more strategic and long term view," Lewin said. "Those who put up gates may have a tougher time getting money back."

(Editing by Sharon Lindores, Leslie Gevirtz)