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Laxman Pai, Opalesque Asia: Preqin said that it expects hedge funds to hold onto their position as the second-largest alternative asset class in 2025, despite relatively weak growth in assets under management (AUM) due to continued outflows.
AUM growth will be the lowest of all asset classes at a CAGR of 3.6% per year. Preqin forecasts AUM to reach $4.28tn in 2025, up 19.6% from $3.58tn at the end of 2020.
"We predict that hedge funds will lose out to passive exchange-traded funds (ETFs), smart beta, and other liquid alternatives that offer risk-adjusted returns at a lower cost. We expect AUM to be boosted by performance, with hedge fund returns beating the AUM growth rate over the next five years," said Julian Falcioni, a senior research associate at Preqin.
The Preqin All-Strategies Hedge Fund Benchmark posted an average yearly return of +6.27% from 2015 to 2019.
According to the Preqin report, increasing investor appetite for liquid alternatives - which include ETFs, UCITS, and alternative mutual funds - has come at the expense of hedge funds. Since these options provide inexpensive returns with high liquidity, this trend should continue.
Most liquid funds offer daily liquidity and fees below 1%, compared to the typical 2/20 and longer lock-ups for hedge funds. Besides, liquid alternative products offer more customized solutions for investors, with different products geared toward obtaining alpha and beta.
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