Research by Morgan Stanley based upon data from Tremont Capital shows that hedge fund inflows tailed off noticeably in the latter half of 20...

Research by Morgan Stanley based upon data from Tremont Capital shows that hedge fund inflows tailed off noticeably in the latter half of 2004 compared to the first half of the year, as private clients grew more reluctant to place money into hedge funds.

Net new money grew by 20 per cent in the first six months, slowing to 10 per cent in the final half of the year. The research predicts that strong inflows will be maintained during this year with net new money likely to be up on average 10 to 15 per cent as pension funds allocate more assets to the alternative investment sector.

According to Morgan Stanley analyst Huw van Steenis, the bulk of this new money will be allocated to fund of hedge of funds. "We think over 75 UK pension fund plans have now made allocations to hedge funds, with all bar six going via funds of funds,” he said.

Only 15 per cent of UK investment mandates are now balanced across a range of assets, compared with over two thirds five years ago, according to the research.

The research also notes an increased polarization in fund management between cheap index tracking and specialist high return, and novel investment strategies.

"On one side, quantitative houses, offering cheap and effective ways to track market indices, are increasingly encroaching into active management. On the other, there is a strong demand for spicier strategies, such as hedge funds, other alternatives and specialist products that offer mouthwatering returns," the report said.

Beta (market tracking) investments on the core passive side of the asset management industry are now typically given over to the large quantitative managers who can use scale to run their businesses efficiently. Index managers including Barclays Global Investors, State Street and Northern Trust now have an estimated $4 trillion in assets under management globally.

On the other side of fund asset management, the robust expansion in alternative investment products is continuing and using hedge funds, property funds, private equity structured products and portable alpha, portfolio overlays and derivatives to outperform the market.

The research shows that Barclays Global Investors, the world leader among quantitative specialists won $106 billion in net new investment money in 2004, an 11 per cent increase. A growing proportion of this inflow went into higher margin active management activities such as commodity and tactical asset allocation strategies.

According to the research, Schroders retail investment operations are benefiting from wholesaling its high alpha funds in European and Asian. The firm is also benefiting from margins twice that of the institutional side. It saw a 27 per cent increase in net new money last year with revenue margin rising to 49 basis points from 46.

The research found that Julius Baer has benefited from another investment trend, the huge demand for non-dollar assets, with its high performing international equity fund.

Listed UK hedge fund manager Man Group still has the highest profitability per asset of any major quoted or captive group, the report added.

The net losers in this profound shift in the European asset management industry are those companies with performance issues, or that are insufficiently nimble to react to change.

These include Anglo-US Amvescap where performance and regulatory issues have hit its retail funds in the US particularly hard and Deutsche Asset Management's institutional business, which has also had performance problems and suffered from the loss of balanced pension investment mandates