What Will Hedge Funds Look Like in 5 Years?

Both 2018’s hedge fund performance record and Super Bowl LIII results are in the record books. While it is relatively simple to understand the past, the future is exponentially more difficult to grasp. More than three-hundred fund managers and 120 institutional investors participated in a Prequin survey in an attempt to divine the future of the hedge fund industry. Here’s how they perceive the next 5 years unfolding.

Hedge Funds Fall to Second Place

Currently, hedge funds are the largest class of alternative investment and is predicted to grow by 31 percent over the next 5 years to become a $4.7 trillion industry. However, private equity is anticipated to grow by $1.8 trillion in the next 5 years, eclipsing hedge funds by reaching $4.9 trillion in assets under management.

Shrinking Hedge Fund Investment

Among those currently invested in hedge funds, around 1 in 4 expect to increase their allocations to hedge funds over the next 5 years, while fewer than 2 in 10 plan a decrease in their hedge fund allocations.

Evidence supports that this is already happening. For example, hedge funds experienced net outflows of $11.1 billion in 2018. More to the point, this recent article in Bloomberg presents a graphic illustration of attrition in some of the most lauded hedge fund firms in the industry.

Modest Growth in Hedge Fund Allocations Is Not Necessarily a Negative

Those investors who do allocate to hedge funds tend to invest a larger percentage of their portfolio, typically 14 to 15 percent, as compared to private equity (PE) investors, for example, who typically top out at 9 to 10 percent of their portfolio.

This suggests that even though the number of hedge fund investors may shrink, the size of their hedge fund investment will mitigate the loss of those investors who seek a haven in other alternative asset classes.  In short, the growth of hedge fund assets under management will be slower, but steady.

Single & Multi Family Offices Are Showing Increased Interest in Hedge Funds

Fully two-thirds of hedge fund managers surveyed, believe that family offices will become their primary sources of capital over the coming 5 years. This is consistent with the private wealth origins of the hedge fund industry and a marked departure from the past 15 years of growth, which was driven by institutional investors. Hedge funds are returning to their roots!

What Does This Mean for Hedge Fund Jobs?

The rapid expansion of hedge funds and the corresponding increase in the numbers of hedge fund managers and staff is a well-established fact. However, the universe of active hedge fund firms has leveled off since 2016 to approximately 14,800 hedge fund firms world-wide. Hedge fund managers are largely agreed (91 percent) that consolidation will be the hallmark of the next 5 years, with 26 percent of hedge fund managers suggesting that the consolidations will be significant.

If these predictions come to pass, one might reasonably anticipate substantial employee turnover. The manner in which hedge fund managers approach these challenges will determine the future for jobs in the hedge fund industry.

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