What does the future hold for the hedge fund industry, given its history of innovation? What kind of products will funds deliver to their investors? How will they reconcile profits with social responsibility? Will hedge funds as we know them even exist, or will they be replaced by machines?

The recent disruption has shown the industry to be highly adaptable and resilient in the face of massive market disruption. We are in the middle of an evolution where hedge funds that innovate and are flexible will become asset managers that succeed and grow. Looking out over the next five years, two significant thematic trends will dominate the outlook for the industry.

Funds Must Embrace Change

Efforts to integrate ESG across investment products will intensify, led by demand from investors and requirements by policymakers. Out of this disruption, we expect to see increased interest in strategies that incorporate ESG and sustainable finance considerations. Sustainability, climate change, and social concerns are now considered core risks and objectives by asset managers and allocators. At AIMA, we strongly believe that alternative asset managers are well placed to deliver double bottom-line benefits: superior investment returns by doing good socially and environmentally, while actively encouraging high standards of governance.

The second mega trend is technology. Every industry in the world is being disrupted or will soon face disruption by technology. The advent of cutting-edge statistical and computational tools is increasingly pushing the hedge fund industry toward a more quantitative outlook. Over the coming years, machine learning and the use of alternative data will become steadily more important for hedge fund firms until it becomes a necessity. 

One thing will remain constant: the success of a hedge fund firm depends on the quality of its most critical asset – its people. Fostering diversity and inclusion is an imperative for all businesses, hedge funds included. Allowing greater innovation and a wider variety of voices to be heard will result in better decisions being made and better investment outcomes. 

The industry will continue to grow because hedge funds still provide the opportunity to source differentiated investment exposure with non-correlated returns. A major rethink on portfolio allocation must surely see alternative investments play a greater role in investor preference, with hedge fund investing being more prominent.

AIMA was delighted to participate in Preqin's Future of Alternatives. The full series can be found at www.preqin.com/future