Hedge Fund Industry Trends to Watch Out For Throughout 2024

Hedge Fund Industry Trends to Watch Out For Throughout 2024

The hedge fund industry constantly evolves, and its dynamic nature allows those who adapt and embrace change to thrive. At the same time, though, those who do not adjust to the transformative nature of the industry are likely to suffer. Staying on top of the latest industry trends is crucial, and it is also helpful to pay attention to industry predictions. Doing so enables you to adjust thoughtfully and quickly. What are the hedge fund industry trends to anticipate for 2024?

Moderated Growth

The industry has grown rapidly in recent years, but the pace may slowly wane in the year to come. Per Statista, the industry was valued at $5 trillion last year. This is up from $265 billion in 2000. The reason for the anticipated industry slowdown lies in saturation. The investors and managers who have already incorporated hedge funds in their portfolios are not expected to pull back. However, many of the advisory firms, wealth funds, pension funds and others are not expected to significantly increase their allocations. This leaves less room for growth. Nonetheless, the industry is projected to grow at a rate of 6% through 2024.

Heavy Reliance on Marketing

With more than 15,000 hedge funds at the start of 2024, competition is fierce. A large majority of the market share is controlled by the top 10% in this group. However, it is not enough to offer excellent products. The most successful hedge funds have developed and implemented solid marketing and sales strategies. Often, this means working with a reputable, proven marketing firm and having a good in-house sales team. Looking ahead, the industry may consolidate, and those that do not have excellent sales and marketing strategies in place may face a risk of closure.

High Portfolio Turnover

The past year has been wrought with substantial performance differentials. This is largely based on the investment strategies of different fund managers, some with poor execution of sound strategies. In a typical year, roughly $1 trillion of assets are turned over. This change is due to investors shifting their investment strategies and optimizing their returns. Because of the dramatic differences in performance recently, 2024 could bring higher-than-average turnover.

Increased Use of AI and Blockchain

As technologies like AI and blockchain advance, they are increasingly becoming relevant in the hedge fund industry. Artificial intelligence is used by some fund managers to test various strategies quickly and to refine them for enhanced outcomes. Blockchain tech is fostering the growth of cryptocurrency hedge funds. These are funds that support the advancement of blockchain tech and cryptocurrencies. While both AI and blockhain are actively used in the hedge fund industry today, additional uses and applications for these technologies may evolve in 2024.

A Decline in Private Equity Funds Returns

While private equity funds and hedge funds are increasingly related, there are important differences between them and the returns they generate. While private equity returns have been impressive over the last several years, investors face increased risks today. This is because of the large number of private equity firms that are not liquid. This increased risk will cause some investors to pull away. However, there are opportunities for extraordinary gains with some niches.

Fund Fee Adjustments

Hedge funds are strongly boosted by institutional investors, so the fund managers are increasingly lowering the fees for these investors. Some have or will be implementing a tiered fee structure based largely or exclusively on allocation. Others are customizing their fee structures for specific institutional investors. In addition, some hedge funds are now sharing the firm’s equity ownership with institutional investors.

Changes to Managed Accounts

Managed accounts are increasingly popular among larger investors. These accounts receive personalized attention with separate account management. As a result, the investors benefit from greater transparency, improved expense management and more say over how their assets are invested. To meet the growing demand for managed accounts, there may be an increase in the number of hedge fund managers who support managed accounts. In addition, some hedge fund managers may increasingly accommodate investors with fewer starting assets.

Superior Performance from Smaller Hedge Fund Managers

Compared to managers of larger hedge funds, the managers of smaller funds have outperformed them over the last five years. Based on evidence from the HFRI Fund, the difference was 1.22% over one year and 1.87% over five years as of November 2023. Because of their known superior performance, some investors have shifted their interest and assets to smaller fund managers. This influx of assets has enabled smaller fund managers to deliver excellent returns for their investors. However, as a fund grows, it is less able to use contributions for added value. The popularity of smaller hedge fund managers will likely continue nonetheless.

Continued Use of Virtual Meetings and Work

Moderating a fund’s operational costs requires a close look at each line item in the budget. Virtual meetings eliminate travel costs and inefficiencies. In addition, these meetings can be recorded and viewed by other relevant parties at a later date. The rise of virtual meetings and work enables those who may not be able to attend the meeting in person to join and participate from their location.

Pension Fund Evolution

Many pension funds are failing to meet their expectations of returns. This creates a strong need for these funds to hasten their investment process. This evolution is supported by fund managers growing increasingly knowledgeable about pension funds. In addition, many funds are expanding their research teams to support faster and more informed decision making. With these changes as well as a shift in capacity-constrained strategies, hedge funds are gradually dropping their asset limitations and requirements.

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