Asset Flows Move to Hedge Funds, says TABB Group

The quest for alpha will result in a major shift of assets to hedge funds and active-extension funds, TABB Group says. While actively managed U.S. equity mutual funds, the largest segment of the mutual fund industry as measured by assets under management, will remain relatively flat with just 3 percent growth in the next few years, assets in 120/20 and 130/30 active-extension funds are set to explode from $140 billion in 2007 to nearly $2 trillion by 2010, the Needham, Mass.-based consultancy reports.

According to a recent TABB Group report, "Alternative Investments 2007: The Quest for Alpha," 90 percent of fund managers interviewed believe that the growth of active-extension funds will increase as the pressure for increased yield and increased fees push traditional managers into this new area. Alpha-seeking firms "are becoming more creative, moving overseas and toward frontier markets; moving up and down the capital structure; moving toward shorter-term, event-driven strategies and longer-term holding strategies that resemble private equity-type investments," said TABB Group founder and CEO Larry Tabb, who coauthored the report with senior analyst Jeromee Johnson. Tabb added that shorting and leverage, used by the first hedge fund as early as 1949, "are becoming more ... mainstream."

In the study -- for which TABB Group interviewed 67 portfolio managers, chief investment officers, heads of research and senior managers of hedge funds, funds of funds and traditional long-only asset managers -- Tabb predicts the shift in assets under management will affect how firms are serviced and brokered, technology infrastructure is implemented, and operations are structured.