Hedge Funds Dismiss Capacity Effect, Look to Positive Future

Stephen Harris

12 August 2005

Despite worries that the “capacity effect” would affect hedge fund profitability, the industry remains positive about growth potential according to the latest survey of the sector by Edhec, the French research firm. Lower returns in the industry were thought to reflect the fact that it has reached capacity and is having difficulty evolving. The research found that 70 per cent of the 183 hedge fund and fund of hedge fund managers surveyed believe that cyclical rather than capacity factors were the main reason for recent declines. Over 65 per cent of those surveyed thought that the hedge fund industry would continue to grow by 10 - 15 per cent in asset terms in the next five years. Some of these felt this growth would be as high as 15 per cent. The research also undermines the concept of critical size for hedge funds. Respondents either thought that there was no critical size or that critical size depends upon the strategy followed by the manager as different strategies require different levels of resources. 81 per cent of those surveyed also thought that the industry was becoming more professional and they expected innovative new products creating stable, if not higher, returns.