The hedge fund industry has survived the global financial crisis, diversified its offerings beyond its traditional investor bases, and is currently in a phase of optimizing its business operations and offerings, according to Citi Investor Services’ 5th Annual Industry Evolution survey.
By all metrics, the industry is thriving, with assets continuing to grow to new record highs. Citi sees the total pool of capital being advised by hedge fund managers doubling from $2.9 trillion in 2013 to $5.8 trillion in 2018.
In addition to offering more access to retail investors and creating customized solutions for institutional investors, hedge fund firms are increasingly engaging investors in an advisory capacity to support their clients’ overall portfolio, and expanding into functions beyond their traditional role as just asset managers.
“The hedge fund industry is entering its next evolutionary phase – one of optimization – a term we use to describe how firms are expanding, customizing and focusing their overall businesses,” said Sandy Kaul, U.S. Head of Business Advisory Services at Citi. “Investors are increasingly looking at hedge fund firms more as consultative partners to construct customized portfolios and capture new avenues of uncorrelated returns. In addition, the industry as a whole is beginning to fulfill some of the roles that banks used to traditionally own.”
Isolating Risks, Playing the Role of Banks
Another theme of optimization drawn from the survey is that the industry’s largest allocators are blurring the lines between investors and hedge funds. Many of the leading institutions that invest in hedge funds have built out their own asset management organizations to complement their specific exposures from hedge funds. These investors have also built sophisticated risk and portfolio management platforms, which allow them to run analyses on position level information being fed to them by their underlying hedge fund managers.
This is allowing some investors to co-invest into securities and to directly invest into markets alongside their hedge fund counterparts. These participants are also helping to fill a market-making and lending gap that has emerged from sell-side banks that are pulling back, and increased sensitivity to balance sheet impacts from the traditional dealer community. Underlying hedge funds themselves are also filling this bank-like role and diversifying their offerings.