Hedge funds are moving out of the realm of the “alternative” and into the mainstream of investing, according to a new study. They are also g...

Hedge funds are moving out of the realm of the “alternative” and into the mainstream of investing, according to a new study. They are also gaining popularity in less liquid markets such as distressed debt, junk bonds and credit derivatives, according to a study by the investment advisors Greenwich Associates.

The study found that institutional capital is making up a growing portion of hedge fund inflows. Over a quarter of large institutional investors in the US, Japan and continental Europe use hedge funds, says Greenwich.

But as hedge funds gain in popularity, their returns are beginning to fall. As more money flows into the sector and hedge funds proliferate, arbitrage opportunities are diminishing.

“It is unlikely that hedge funds as a broad-based industry of hundreds of billions of dollars will be able to replicate the robust returns generated by a relatively small number of funds in recent years,” said the Greenwich study.

The study also found that hedge funds controlled as much as 82 per cent of all trading volume in the US distressed debt market in 2004. Hedge funds also account for almost a third of all trading in US junk bonds and credit derivatives. They also dominated exchange traded fund trading, controlling more than 70 per cent of all US trading volume.