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The Future of Hedge Funds: Top Trends to Watch Out For in 2022

Hedge Fund Trends
Published on Apr 07, 2022

With the world slowly recovering from the pandemic, the economic market is reacting accordingly. The pandemic uncertainty has created both challenges and opportunities for hedge funds. After two years of investor outflows, the hedge funds industry finally turned the corner in 2021, recording $25 billion in net investor inflows. While the industry hasn't recouped the outflows, it does look like things are looking good for hedge funds based on investor intentions in 2022.  

Hedge funds are investment organizations that make investments and trades from pooled investment funds. Hedge funds enjoy their success by utilizing complex trading techniques, focusing on risk management, and leveraging short/quick selling. Hedge funds are unique from other investments as they are not regulated as mutual funds and exchange-traded funds. They are considered open-ended and enable investors to pull out capital depending on the current status of the value of the assets.  

Owing to the dynamic nature of the hedge fund industry, 2022 is believed to be the most transformative year in its history. Managers and investors are anticipating as well as preparing for the changes that will likely follow.  

Global macro managers are repositioning their portfolios to take advantage of the near-term opportunities in currencies, commodities, and rates. Hedge fund experts are also observing due to the rising inflation pressure on longer-duration & shorter-duration value-oriented stocks.  

hedge fund investment

In an environment where things are volatile, and the public is more socially conscious than ever, hedge funds must reevaluate their strategies for attracting investments as well as clients. Combined with the growing importance of technology, hedge funds have a lot to look forward to in 2022.  

Read more: Top Hedge Fund Industry Trends, 2021 

2022 and beyond: Hedge Fund Trends that will Dominate the Industry  

The hedge fund industry has not experienced the best performances in the past decade but is likely to change in 2022. Hedge funds surpassed the S&P 500 last year, starting to prove their worthiness as a tool for diversification and returns.   

The COVID-19 pandemic brought unforeseen challenges for investors. While the hedge fund performance in the past was not very rewarding, the recent market crash directed investors to why hedging is essential.   

Despite a negative public perception, hedge funds have managed to record impressive performance. If actively managed, hedge funds can perform better than expected in the forthcoming years. Which will be the most prevalent future hedge fund trends, and how will they impact our investment decisions?  

The following sections highlight the top hedge fund trends that will dominate the industry in 2022 and beyond.   

Top Hedge Fund Trends to Watch Out For  

  1. Continuous Growth and Outperformance  

Hedge fund assets are expected to grow in 2022, thus marking their most significant transition in the past decade. While the past few years were marked by their performance growth, 2022 is expected to record an all-time peak due to net inflows.   

In 2022, fund performance in the hedge fund industry will likely meet investors' expectations despite the pandemic. While a continued positive performance after Q1 led to improving investor confidence, the continuous growth is anticipated to come by allocating funds to strategies with higher expected returns, thereby shifting away from low-yielding fixed-income investments. 

  1. Hedge Fund Industry to Go Digital, Leverage Technology to the Fullest 

Having access to quality data and reporting right at your fingertips is more significant than ever. While only large hedge fund managers previously leveraged AI & machine learning tools to identify performance opportunities, mid-sized managers are now following this trend. This reinforcement will enable managers to check whether the data being fed into their systems is accurate. 

To stay competitive, hedge funds need to fully employ technology to optimize efficiency in all processes, including:  

  • Reporting and data analytics  
  • Investment research  
  • Client communication  
  • Trading & Marketing   
  • Regulations and compliance  

In 2022 hedge funds will experience an increase in automated systems that will facilitate significant cost benefits. 

  1. Investors to Embrace Alternative Investments  

Asset allocations will likely evolve for multiple reasons. 

  • Equity markets will continue to be undesirably volatile. With the stock market experiencing volatility, investors are stressing their fear of market volatility. This will lead to stable alternative assets garnering growing consideration. 
  • The speculative equity bubble will continue to grow and create systematic market risk. With record-breaking stock prices, investors are exploring avenues to diversify away from major tech stocks. A recent CNBC survey of financial executives revealed that 76% believe it is time to be conservative in the stock market.  

Investors today are looking for different places to invest, and many are turning to alternative assets. This inclination to alternative investment is guiding investors on the path of cryptocurrency. With the advancements in financial technology, digital investment platforms are circumnavigating direct investment by pooling smaller contributions into funds that represent aggregated ownership interest.  

  1. Focused Approach towards ESG  

Although the ESG approach in the hedge fund industry is not new, there has been little to no implementation over the past years. With many European institutions integrating ESG in their investment diligence, the trend will likely become the new standard.  

The COVID-19 pandemic highlighted the economic and social inequalities, leading to an elevated focus on social justice. Public/private pension funds, endowments foundations, and sovereign funds gained about 65% of the hedge fund industry, making hedge funds a crucial player in this matter.  

While ESG criteria are starting to simplify, industries and investors are exploring ways to filter companies with low ESG scores to exclude them from the portfolio. 

  1. Better Access to Investor Meetings  

The pandemic has changed the way industries work. The adoption of virtual meetings has forced the hedge fund industry to adapt to these new changes.  

This has led to reduced time and expenses for investors and managers. Scheduling flexibility and other benefits of virtual meetings will now enable investors to take advantage of this new approach, and this trend is likely to remain in 2022 and beyond.  

Another advantage of this trend - early-stage virtual meetings will permit smaller funds to enjoy better access to investor meetings. In years to come, the hedge fund industry is expected to carry out a substantial portion of its introductory meetings and other events virtually.  

Read more: Top Trends That Will Shape Investment Banking In 2022  

Hedge fund trends in 2022

  1. Long/short Equity to Grow as the Hottest Hedge Fund Strategy  

The most sought-after hedge fund strategy currently is long/ short equity. Family offices are seeking long/ short equity managers to help them identify the strategy and plans to boost their exposure. 

Equity valuations are of prime concern for foundations and endowments, and family offices, which is the reason why they seek long/ short equity funds. The lingering geopolitical tensions and pandemics drive the increased appetite for long/ short equity fund managers among institutional investors.  

Two issues contain distorted valuations, thus leading to creating challenges in traditional asset investing. Smaller investors like family offices who perceive high valuations and market uncertainty as primary factors are facing challenges accessing some of the larger private markets and real asset opportunities. Many investors are spotting the opportunity to use fundamental research. This will lead to the expectation of returning of adoption of long-short equity strategies. 

  1. Labor Scarcity will Fuel the Outsourcing demand

The labor shortage is threatening the wider global economic recovery due to pandemic uncertainty. This issue is starting to affect the hedge fund industry. Many experienced hedge fund staff are leaving for other roles, and some hedge fund jobs are going unfilled. This manpower shortage is forcing hedge funds to outsource certain functions in different domains of operations. With these labor scarcities to prevail, the need for hedge funds to outsource their operations will likely grow. 

  1. The Growing Significance of Private Credit Strategies in Markets  

Institutional investors are increasing their focus on private credit strategy markets. This trend will be maintained throughout 2022 and beyond. 

Pandemic changed the way business works and even challenged firms' viability. As many firms could not access these funds, private credit managers filled in this need. Private credit will enable investors to achieve a new type of hedge, income, and diversification due to the increasing volatility of the investments and lower fixed-income yields due to pandemics.  

Read more: Global IPO was record-breaking in 2021; Should we be preparing for headwinds in 2022? 

Hedge Fund infographic

Looking into 2022: The Future for Hedge Funds  

The hedge fund trends are showing a mix of opportunities and challenges. Hedge funds will continue their success graph in 2022 by mitigating the risk arising from market volatility, leveraging tech, and incorporating digital assets. 

Hedge fund investors will experience significant opportunities for an alpha generation as markets recalibrate for a more unpredictable future. Hedge fund investors willing to pursue diverse and uncorrelated strategies will find possibilities in a shifting array of near-term market dislocations and longer-term secular trends.  

The coming year appears destined to usher in a period of change and holds the potential for greater market volatility – a key enabler for hedge funds. In this era of pandemic-induced unease, hedge funds may also provide downside protection and strategic diversification, making them critical to building a well-diversified portfolio. 

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