The Hedge Fund Industry Likely to Split in Two

Faced with pressure from investors to lower fees and the possibility of stricter regulations, the hedge fund industry is likely to split in two.

In one camp will be the giant hedge fund firms, which will be subject to the most regulation but can afford the costs that come with it. They will probably get even bigger and increasingly look more like plain-vanilla mutual funds in terms of transparency and government oversight.

In the other camp will be smaller funds that avoid most of the looming regulations, as authorities focus on firms with huge assets that pose a systemic risk. These funds will in many ways look like traditional hedge funds in terms of their nimbleness and tendency to bet against the rest of the market, likely attracting mostly high-net-worth individuals and investment funds that have the wherewithal to carry out due diligence.

While these smaller hedge funds would pose more of a risk, many would likely provide the “absolute” returns hedge funds were once known for, and their fee structure will likely remain intact.

A clear split in the hedge fund world could give institutional investors what they want and high net worth individuals what they want. [via Dow Jones]