Alfred W. Jones opened the doors of the world’s first hedge fund firm almost 70 years ago. He could not have known it at the time, but his innovations would sow the seeds of a new industry that would change the face of investing.
The story of the hedge fund industry since then has been one of continued growth and innovation. Today’s hedge fund firms trade in everything from vintage wines to risk factors, using cutting-edge mathematics to manage risks and even to execute trades—the stuff of science fiction in Jones’s days.
At the same time, the industry’s investors have changed. The benefits of hedge funds are no longer restricted to the few. Pensions, university endowments, and sovereign wealth funds now number amongst the industry’s largest investors. The industry is also increasingly open to retail investors, meaning that everyday investors are able to access the same financial innovation and rigorous risk management that was once only available to the wealthiest investors.
Many have questioned what the future holds for the hedge fund industry, given its history of innovation. What kind of products will hedge fund firms offer to their new investor? How will they reconcile profits with social responsibility? Will hedge fund firms even exist in the future, or will they have been replaced by artificial intelligence systems? If they do still exist, and are still staffed with humans rather than machines, how will hedge firms navigate the coming generational change in leadership?
The Alternative Investment Management Association (AIMA) and Aberdeen Standard Investments (ASI) decided to answer those questions. We are delighted to introduce Perspectives: Industry Leaders on the Future of the Hedge Fund Industry, our look at the future of the hedge fund industry.
This paper is based on conversations with 25 of the leading figures in the hedge fund industry, from founding principals at hedge fund firms, to senior management at multi-asset managers, to industry academics. Collectively they represent close to 300 years of leadership experience in the hedge fund industry and over $500 billion in assets under management. We would like to thank them again for their participation in this paper, and for sharing their insights with us.
The picture those individuals painted in our conversations was of an industry embracing change while staying true to its primary focus of delivering for investors. They were excited about the challenges they faced and optimistic about their ability to evolve and remain valued partners to their clients. Far from failing to embrace change, hedge fund firms are thriving on it, exploring new ways of protecting and growing the capital of their investors.
This paper is also the result of the dedication of the members of AIMA’s Research Committee, who sifted through hundreds of pages of interview transcripts and spent months writing, editing, and rewriting dozens of drafts. We would like to take this opportunity to thank each of them for their efforts.
Chief Executive Officer, AIMA
Global Head of Client Driven & Multi-Manager Solutions, Aberdeen Standard Investments
By Tom Kehoe, Director, Global Head of Research, AIMA
The hedge fund industry is at an inflection point. Changing investor expectations are forcing hedge fund firms to rethink the investment solutions that they offer. The pace of technological change and the rise of artificial intelligence is leading some to question whether the hedge fund proposition will even exist in a few years. Responsible investment, meanwhile, is becoming more of a priority for hedge fund firms, as they gradually overcome their reluctance to constrain themselves. All of these changes are in turn forcing hedge fund firms to re-evaluate their own inner workings, from how they service investors through to how they build a business that outlasts its founders. For the purposes of this paper, the term ‘hedge fund firm’ includes diversified alternative investment management firms that provide investment management services including a variety of fund products, such as pure hedge funds and liquid alternative products.
The paper is based on the views of some of the leading figures in the hedge fund industry, including the leaders of asset management firms and renowned academics from around the world. Each participant shared their unique perspective on the changes facing the industry, and how best to contend with those changes.
Our conversations with the paper’s participants centred on three key questions:
- What must hedge funds do to maintain their value to investors?
- How will the hedge fund industry be shaped by external forces of disruption and global megatrends?
- How will the structure of hedge fund firms need to change in order for them to remain relevant to the investors and the workforce of the future?
In addressing each of these themes, this paper will examine the major issues facing the hedge fund industry. To begin with we will examine how the products offered by hedge fund firms are changing, and how this change is enabling the industry to cater to increasingly varied investor demands. Next, we will investigate the forces of change most likely to impact on the hedge fund industry over the coming decade: the rise of artificial intelligence and related technologies, and a growing demand for responsible investment options. The final part of this paper will explore how hedge fund firms are reacting to these transformations, changing everything from the services they offer investors to how they staff and structure themselves.
This paper is divided into three main chapters, which are in turn subdivided into two sections each. It is designed so that each chapter, and each section, can be read as a separate paper.
In recent years the hedge fund industry has been criticised over its performance (allegedly below par), its fees (allegedly too high), its size (allegedly too many fund management firms), and its next generation of leaders (allegedly too few in number). Put another way, hedge fund firms have been accused of not keeping up with a changing world.
What we found, however, was an industry embracing change. From the creation of new investment solutions to the implementation of cutting-edge technology to stay ahead of the pack, hedge fund firms are meeting the challenge. In the coming years, hedge fund firms will continue to refine not just what they deliver to their investors, but how they deliver it.