The state of the hedge fund industry has been a frequent topic on this site. Despite the calls for the demise of hedge funds they have established themselves as a vital part of the financial services industry.

Matthew Lynne at revisits some predictions by prominent investors who called for the reversal of hedge fund momentum. Comments by Bill Gross and George Soros are noted as premature calls for a top. Indeed hedge fund momentum continues apace.

Money is pouring into the funds. Goldman Sachs Group Inc.'s annual survey of the industry last month said investors expected a 28 percent increase in the assets they put into hedge funds this year. There was evidence of “increasing participation of institutional, liability-driven investors,'' Tim Morgan, a Goldman Sachs managing director, said in a statement.

Lynn does not believe that investors are being fooled by the hedge fund establishment. Despite the seeminly high fees big institutional investors continue to push wholeheartedly into this form of management. While some skeptics might view this as a desperate hunt for alpha, Lynn is far more sanguine.

Investors don't want to just match a benchmark. Most aim to preserve their capital, and make a profit as well. They don't mind paying generous fees to fund managers who can deliver that. Indeed, they are also suspicious of money managers who don't have their own financial wellbeing tied to the fund they run.

The growth of hedge funds reflects genuine demand for a different type of investment.

The bubble may burst one day — just as one day we may decide we don't need cars or computers anymore. It is a long way off. Ignore the predictions of a hedge-fund demise. The industry has a lot of growth left in it yet.

What may be happening is as institutional investors become the primary investors in hedge funds it has become harder for small, start-up funds to gain traction in the marketplace.

DealBook notes the case of a small hedge fund that has lowered its incentive fee as a means of attracting more investors. notes a Morgan Stanley survey that shows that investors are focusing on hedge funds in excess of $100 million in assets managed by teams with established track records. In short the hedge fund game is rapidly becoming a game played by and for the big boys.

With this rush of cash, hedge funds have been touted as being the newest investors in every type of asset class, venture capital included. Rebecca Buckman in the Wall Street Journal cites the example of some hedge funds becoming a significant funding source for venture-stage technology firm. However Paul Kedrosky is skeptical that the story is meaningful, stating, "Sure, it happens, but it's rare, and largely self-limiting to later-stage companies."

Hedge funds have become an important story in a variety of ways, not least of which is their incursions into new investment types. The challenge is of course discerning between which of these is meaningful, and which of them are simply on-offs.

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