Hedge funds, which rebounded in 2009 after suffering a market drubbing in the previous year, are expected to enjoy higher capital inflows this year, while marketing of their wares will become more important and due diligence checks become more extensive, a new report says.

The report was carried out by US consultancy Agecroft Partners, based on conversations with more than 200 hedge fund organizations and 1,000 institutional investors last year.

Although the hedge fund industry recovered some of its poise in 2009, assets have fallen about 40 per cent from peak levels and industry revenues have fallen by about 70 per cent from their peak, the report said.

“The asset raising environment slowly improved during the 2nd and 3rd quarter [of 2009], with a significant increase in the 4th quarter. However, it was still down an estimated 60 per cent to 70 per cent from the peak,” it said.

“During each successive quarter in 2010, we expect hedge fund capital inflows will continue to improve. A major driver of this renewed growth will be a gradual yet substantial increase in allocations made by pension funds,” it said.

The report said that high net worth individuals who have invested in hedge funds will return to the sector, but the pace will depend on whether such investors operated privately, or through institutional structures such as family offices and private banks. Institutional HNW investors tended to show less inclination to rapidly pull out of the sector in times of stress.

Private HNW investors, however, have tended to chase performance and have fewer resources to scrutinise investments, the report said, adding: “Unfortunately, we believe that this group bears primary responsibility for redemptions from both hedge funds and hedge fund of funds in the recent crisis. A large percent of assets controlled by this latter group have left the hedge fund space and we anticipate their return to be a lengthy process.”

Agecroft Partners said hedge funds will strive to return to their old asset peak levels by more aggressive marketing of their products during this year.

Among other trends, the report said it expected to see continued consolidation of the industry in 2010. Some larger funds of hedge funds closed down due to exposure to the Ponzi fraudster Bernard Madoff, or because of poor performance and strategic decisions by a parent company.