Hedge funds have been gaining popularity in both the U.S. and Canada as investors search for alternative investment strategies, particularly those with protection against market volatility. According to Boston-based Financial Research Corp., global hedge fund assets under management are expected to top US$1 trillion by 2004.

On Wednesday, FRC released a research study which focuses on the challenges of creating and marketing hedge fund products to “merely affluent” investors. Entering the World of Hedge Funds: Opportunities and Obstacles for Targeting The Affluent examines new developments in both traditional private hedge funds and the innovation of “registered” hedge funds in the U.S.

“Given that redemptions outpaced sales of Canadian mutual funds for a second straight month in May, manufacturers in Canada should be looking past the mainstream product offerings into more specialized investment vehicles to retain assets,” says David. Enns of Credo Consulting Inc., FRC’s joint marketing partner in Canada.

High-net-worth and institutional investors have long used hedge funds and to manage risk in their portfolios. But now, manufacturers are realizing the potential for registered hedge fund products to compete for the assets of the merely affluent clients as well. Until recently, hedge funds have been available on to ultra-high-net investors with US$1 to US$5 million in investable assets. With registered hedge funds — and more reasonable investment minimums, the opportunity is ripe to translate the cocktail chatter into actual sales.

The new study offers manufacturers insight in product development and distribution issues, and highlights traps for the unwary.

Some of the key findings of the study include:

  • Funds-of-hedge-funds are becoming the product of choice for advisors catering to high-net-worth investors, and the offering well suited for more down market clients as well.
  • New entrants into the hedge fund industry today are in such a rush to be the first to market their product that they often find that they have not laid the right foundation for their offering.
  • Proceed with caution. If a manufacturer believes that it has all the resources, infrastructure, technology, administrative support, and business plans required to achieve a successful hedge fund product launch, then the firm is probably less prepared than it realizes.