Trickle-Down Economics: Hedge Funds Aim Lower.

Call it trickle-down economics. As the hedge fund industry continues to grow, its distribution channels are shifting, and its aim is getting lower when it comes to the net worth of investors, according to a report from Tiburon Strategic Advisors.

Tiburon estimates that the $1.9 trillion industry will grow to $3 trillion by the end of the decade. While some of that growth will come from the increased interest of endowments, pensions and other institutional investors, much of it will come from high-net-worth-as opposed to ultra-high-net-worth-investors, with as little as between $600,000 and $1 million to invest.

"The channels are changing," said Charles "Chip" Roame, managing partner of the market research firm outside of San Francisco. Hedge fund managers are reaching a new, broader market, through funds-of-funds, hedge fund indexes, variable annuity wrappers, and even mutual fund structures subject to the regulations of the Investment Company Act of 1940 and ERISA-controlled 401(k) and defined benefit plans.

Many of these products will run in tandem with the conventional hedge funds already under managers' control. And while these products will not be able to command the 20% performance fees that, in some circles, have made hedge funds notorious, they will levy expenses of between 6% and 8%, as opposed to somewhere between 1.5% and 2% charged by the average actively managed mutual fund.

"You're seeing the industry grow up right now, and I think that's good for everyone," Roame said.

But not everyone agrees that the so-called institutionalization of hedge funds is good for the industry. Robert Driscolo, who is in charge of hedge fund strategy at AIG Global Investment Group, suggested that many hedge fund managers are "notching it down" and taking fewer risks to attract more institutional investors. "I am not happy about it," Driscolo told BusinessWeek. Driscolo did not return calls to Money Management Executive seeking comment.

Others, though, say it's not a matter of being skittish, it's a matter of being smart about investors' money in the current market climate. After all, big windfall gains are one side of what a hedge fund does. The other side is protecting assets their investors already have, said Lee Schultheis, chief executive and chief investment strategist at Alternative Investment Partners of White Plains, N.Y. "The protection to the downside is what ultra-high-net-worth individuals and institutions are most interested in: to stay risk-free and make money second," he said.