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New report highlights growing demand for smaller or newer hedge fund managers

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The global hedge fund industry is currently facing headwinds from fee pressure, increased redemptions, and liquidations, with the situation being further worsened due to the decreasing number of launches of new funds, as investors around the world are more inclined toward defensive strategies.

That’s according to a new report from – Global Hedge Fund Industry | Growth, Trends, and Forecast (2020-2025) – which reveals that despite these tough times, the industry witnessed double-digit annualised return in 2019 for the first time in the past six years.

The United States accounts for three-quarters of the Assets Under Management (AuM) across the world, in this industry. Despite the increase in hedge fund activity in other regions globally, alongside the United States, the country accounts for 3,405 of the 5,523 institutional investors active in hedge funds and 3,319 of the 5,383 active hedge fund managers.

Given the fee pressure, fund managers in some places have given up the traditional 2-20 fee structure for 0 per cent management fee and 30 per cent performance fee.

Fund managers are also increasingly applying artificial intelligence and machine learning (AIML) techniques to improve operational efficiencies and boost returns. There are 150 active crypto hedge funds collectively managing USD 1 billion AuM (excluding crypto index funds and crypto venture capital funds). Over 60 per cent of these funds have less than USD10 million in AuM, with fewer than 10% managing over USD50 million.

Asset inflow has been consistently negative over the years. In the last decade, the global hedge fund industry initially saw inflows, as investors put money back to work following the global financial crisis. However, three out of the last four years saw overall outflows amounting to approximately USD 140 billion. Meanwhile, a massive rally for long-only assets made generating alpha difficult for hedge fund managers. In absolute terms, performance in the 2010s significantly lagged compared to the 2000s.

For 2019, investors withdrew a net amount of USD 82 billion from hedge funds in the year till November. This marked the worst year for redemptions since USD 110 billion was withdrawn in 2016. Shifting investor sentiment further made the market more challenging for new launches. Mere 529 hedge funds were launched in 2019 – roughly half the number witnessed in 2018 (1,169) – marking the seventh consecutive year of decline. Liquidations outpaced new funds entering the market, shrinking the number of active funds in the industry to 16,256.

Hedge Funds industry seems to consolidate over the years and the fund managers worldwide seem to become more defensive in their strategies.

Investor interest in hedge fund strategies has shifted a bit from 2019. For instance, Multi-Strategy and Quant Equity hedge funds are once again among the most favorable. Another strategy that has seen a dramatic change in sentiment is Generalist Equity, which may be low relative to the other Equity hedge fund strategies, including Sector-Specific, Market Neutral, and the aforementioned Quant Equity, but up from previous years.

The report includes an overview of not only the largest hedge funds by assets managed, but also major digital asset hedge funds. In AuM terms, the largest player in the industry is BridgeWater Associates, with an AuM of USD162.9 billion. 

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