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The eternal question – is bigger better? – has been answered by hedge fund GLG. Now a subsidiary of Man Group, the world’s largest listed fund group, it will soon close one of its solidly performing funds to new investors. GLG reckons if the fund’s assets exceed $1bn it will be too difficult to jump in and out of trades quickly.

The breaking of the “bigger is better” model is one big change in an industry where global assets have just topped $2,000bn. Another is that investors expect less. In 2007, the average hedge fund punter expected managers to pay them an annual return of almost 10 per cent; now they expect about one-third less, says Preqin, the research group.

Those lower expectations help explain the loss of enthusiasm for funds of hedge funds, once a market darling. Since 2008, their assets under management have shrunk by more than a quarter to $910bn. Now that investors have more realistic return figures in mind, they have lost their appetite for the additional layer of fees the aggregators lump on top of those charged by the underlying funds. But the funds of funds’ performance has not helped their case. Over the same period their gains of barely 20 per cent have been almost two-fifths less than the rebound experienced by individual funds, according to Hedge Fund Research indices.

Lower expectations, however, have not lowered demand for the asset class as a whole. Moody’s believes the outlook for hedge funds in 2011 is stable and shows signs of improvement. Public pension plans – some of the world’s biggest investors – now allocate 6.6 per cent of their portfolio to hedge funds, almost double the pre-crisis level. Their enthusiasm partly stems from the new structure of the industry. Three years ago, small new funds struggled to compete with their larger rivals’ scale. Now that size appears disadvantageous, investors can look forward to managers raising new funds with fresh ideas and more variety.

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