Significant changes have occurred since the start of the financial crisis. Top of the list is the fact that hedge funds are no longer flying under the radar of politicians and regulators.

Regulation in particular is going to have a profound impact on the industry. Already practices are changing and the added costs of compliance could start squeezing start-up funds. At the same time the spin-out of proprietary trading desks from banks and other restrictions on their investment into hedge fund vehicles could mean a lot of talented managers entering the industry.

While European legislation will have a profound impact, few expect the traditional model of Cayman/BVI-domiciled funds to change in the short to medium term.

Total assets in the hedge fund industry are on course to hit $2 trillion during the first half of 2011.

European investors are expected to put $52 billion into the hedge fund industry in 2011. Of this, $12 billion will be net flows, according to a survey by Barclays Capital. Although there has been a steady net outflow from hedge funds over the last two years by European investors, this drain has stopped. A major shift in sentiment is expected in 2011.

The majority of money moving into hedge funds will still flow into offshore funds. BarCap expects 75%-85% of asset flows to be into offshore vehicles with Ucits attracting only 10%-15% and managed accounts 5%-10% of investments. This will reverse the trend over the past year when offshore funds had net outflows from European investors while Ucits funds and managed accounts had net inflows.

Despite the fact emerging markets hedge funds showed the strongest growth in 2010, European investors remained shy of these funds and allocated only $10 million of net new capital compared with $19 billion to developed markets. This is expected to change in 2011.

A phenomenon in 2010 was the proliferation of Ucits-compliant hedge funds which are proving to be popular with emerging market fund managers with 120 managers opting for the wrapper. The continued, albeit modest, growth in Ucits hedge funds is underpinned by traditional investors switching from offshore and retail investors moving into the hedge funds offered using the wrapper.

Investors are also expected to be more interested in mid-sized managers in 2011 particularly as an increased appetite for emerging markets and Asia exposure drives money into smaller funds.

Private investors and funds of funds are also expected to start targeting the $100 million-$1 billion range hedge funds in 2011.

An unexpected consequence of the financial crisis has been the reduction in the hedge fund managers investors will invest in, although the trend is almost over.

The movement to direct investment is also forcing an evolution in the funds of hedge funds (FoHFs) sector. Institutions are looking to FoHFs for discretionary services, asking for customisation.