As the Global Financial Services Industry begins to prepare for the post pandemic world, the Hedge Fund Industry has also been assessing the challenges and opportunities ahead and sharpening its strategies. While the implications from the pandemic will continue to reverberate, much knowledge has been assimilated that resonates with Hedge Fund organizations about its people, its technologies, and its cultures. With its investment strategies also well positioned for a strategic place in alternative investment portfolios of investors in the years ahead, the Hedge Fund industry readies itself for that next chapter

We last visited the progress of the Hedge Fund Industry in “Agile and Resilient” (a 2020 report also conducted in partnership with AIMA and KPMG) during a period of significant market volatility and business uncertainty. That report highlighted how well the industry managed risk and volatility for its investors with above market returns, that were often rewarded with new allocations. The virtual operations of these organizations in conjunction with the ecosystem executed operations seamlessly in that decentralized environment. Overall, despite the headwinds, it was an exemplary year for the industry.

At the same time, in contemplating the challenges of working in such an environment, the industry began to focus on several critical issues that it perceived as being challenges to optimal performance. As the pandemic progressed, it expressed concerns about sustaining innovation and fostering collaboration in this virtual setting. Organizations that devoted years to developing a culture for innovation and success knew that maintaining these company values was critical to future growth and attracting and retaining their talented people.

The period also crystallized the importance of its relationship with its investors. As investors pivoted to a virtual capital allocation world, pre-existing relationships mattered. Despite the advances in virtual data room technology, allocations to new relationships were curtailed. Investments in hiring Investment Relations personnel accelerated.

And, finally, the recognition of the benefits of technology, both in the front and back office, became increasingly apparent. The Cyber risks of a decentralized environment was front and centre for all financial services companies. The enabling power of digital technology resounded with the industry.

So as the industry enters the next chapter, our new recent research suggests that the trends we observed a year ago have begun to take on additional dimension and importance. Certain new trends have also emerged as strategic imperatives to the future of these organizations. These issues, as we will describe throughout our study, were top of mind of the firms we surveyed and interviewed. 

1. How does a firm optimize collaboration in the more complex and challenging Hybrid working environment? Who needs to collaborate? How can we continue to also further optimize the virtual structure that is a key component of the model?
2. Who wins the war for talent? How is that done effectively, yet still embracing the goals of innovation and expanding diversity? What is the frontier for that war - Technology? ESG? Investor Relations?
3. To what extent does the current virtual capital raising environment sustain itself? What will be the key changes in the ongoing relationship between managers and investors? As investors continue to play a more active role in portfolio construction, to what degree does product complexity and innovation impact the path forward and the business model?
4. What new investment opportunities emerge from the events of the past two years? Is the industry moving to a product innovation stage that maps toward a new array of portfolio development? Does the growth in private credit and hybrid private equity continue to shape future portfolios?
5. What is permeating all functions within a hedge fund? Technology is clearly the answer. But what is the correct strategy to embrace the digital, cloud, Alternative Data, AI, blockchain innovation race that is occurring? How does the industry embrace the ecosystem to achieve scale?

These are a few of the matters we studied in our latest in depth look at the Hedge Fund Industry. How will the Hedge fund industry embrace these new challenges?  In the summaries that follow, we share the results from the significant themes impacting the industry. Economic uncertainty abounds but the research suggests the industry is well prepared and poised to take the critical generational steps in the next evolution of the industry.

Tom Kehoe                                                                  Steve Menna

Managing Director,                                                   Partner, National Hedge Fund Segment Leader

Global Head of Research & Communications       KPMG in the US

AIMA