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Top Hedge Fund Industry Trends, 2021

top hedge fund industry
Published on May 19, 2021

It is reasonable to assume that the pandemic sent the market globally into a tizzy. It really did. However, the market also recovered at a striking pace.

Hedge funds were one of the drivers of that remarkable recovery.

Even though their allocation nearly halved, growth reached a record peak within the last ten years. 

In 2021, and beyond, the growth is expected to keep rising. Here are the trends that will complement that growth. 

More returns

It is worth re-mentioning that hedge fund growth attained an unmatched milestone in the last decade.

Hedge fundsEven the performance was initially slow, eventually, investing in hedge funds proved to be genuinely lucrative. And while the word lucrative in the hedge fund industry is ordinarily associated with diversification, in 2020, the impressive performance was driven by returns.

According to experts, it is the net-inflows that are responsible for the remarkable gain. The net inflows were at an all-time positive high.

Overall, they attribute the growth to a dramatic change in fund managing strategy. Hedge fund managers, lately, have shifted their focus from fixed, low-income investments to high-return strategies. They believe that the funds have well met the expectations of investors, even in a period of such instability and volatility, and will continue to do so in 2021, and beyond.  

It seemed that hedge funds were going out of favor with investors. In 2021, the impressive performance is likely to change that.

More long-short equity

A large part of the high-return strategy is investing in long-short equity.

A long-short equity investment strategy is characterized by taking a long position on low-valued stocks and shorting (betting against) stocks that investors expect to decrease in value.

The strategy is not new. Long-short equity once dominated the hedge fund industry, comprising nearly 40% of the total assets. However, through the previous decade, their performance had been poor, which compelled investors to focus on low-income, fixed income strategies instead.

What changed dramatically is the relative valuation between the stocks — large and small-cap stocks, growth and value stocks, and the US and non-US stocks. Such an environment is primed for long-short equity success. The funds generated impressive returns relative to the S&P 500 and other indices as well.

Naturally, the demand for long-short equity managers soared. The trend is expected to continue in the coming years.

ESG is a priority

Again, ESG investing is not new. However, while ESG investing raised a few investor eyebrows back in the day, today, it is arguably a priority.

Last year, investments in sustainable growth increased 42%, compared to 2019. If the figure still seems small, here is another perspective: every $1 of the $3 the average American invests goes into funding sustainable growth.

Hedge Fund Industry Trends“Long-short equity once dominated the hedge fund industry, comprising nearly 40% of the total assets.”

As a consequence, pure ESG portfolios alone have been outperforming not just other mixed portfolios but entire S&P 500 indices as well.  According to Merrill Lynch, the ESG market is expected to be worth $20 trillion by 2050.

What changed? A lot.

The modern economy is rife with social and economic inequality. It is identified as a devastating threat to the planet’s well-being. Many modern leviathans such as Facebook have repeatedly, despite being reproached, crossed the line between what is unethical and what is illegal.

Modern investors and customers, and indeed most stakeholders, are not just aware of these violations. But they also want to do something about it.

Increasingly, investors are investing responsibly. Increasingly, consumers are consuming responsibly. The result is a sharp increase in investments that are green, sustainable, and offer long-term growth.

Though, while the terms sustainable and long-term are appropriate, the word green does not do justice to what ESG stands for. Not anymore.

Unlike a few decades ago, when ESG chiefly entailed investing in renewable energy, ESG consulting and investing today is much, much more complex. Private equity, and now hedge fund managers, explore and assess thousands of ESG factors before raising capital. Not just environmental threat but — inclusion, gender gap, pay gap, management style, shareholder policies, labor policies, waste management, consumer welfare, animal welfare, data security, privacy — the list is virtually endless.

Hedge fund managers recognize that these changes are absolutely necessary, that these changes will create true meaning and value. And they are willing to put their money where their mouth is. Last year, more than half of the hedge fund industry comprised ESG funds. In fact, last year, sustainability reached record heights: on its course to $20 trillion, its worth was estimated to be $17 trillion — the highest yet.

Under no circumstances can hedge fund managers overlook ESG. In 2021, and beyond, we are certain they wouldn’t.

Small firms could take a hit…or not?

Yes, the market recovered. But the concentration of value was uneven. It is not hard to guess that it was the big players who profited most. And there is a possibility that the trend could well extend into 2021.

ESG trendsExperts reason that since investing in small hedge fund firms involves greater risk, investing in them warrants an in-person meeting. While early-stage meetings can be conducted virtually, say, on Zoom, late-stage meetings warrant a personal touch. Of course, this was impossible given the social distancing mandates.

Add the uncertainty in the air to the equation, and you have investors that will most likely gravitate towards the biggest managers in the market.

That said, this is, of course, rapidly changing as more people get vaccinated.

Additionally, think about it: are Zoom meetings really that bad? If investors adjust to the ‘new normal’, and many would, they will recognize that virtual meetings are more cost-effective and flexible.

Let’s also not forget that in times of such uncertainty, many investors — mostly, perhaps, small and medium-sized — would rather invest in smaller hedge funds, as they charge much less. What’s more, the funds they have to offer, the likes of retail-oriented and publicly traded funds, offer fewer restrictions.

Then, there is outsourcing.

Small and medium-sized hedge funds can save on costs by outsourcing a variety of services. Except for working on the core principles, hedge funds are now outsourcing investment research, accounting, marketing, among other practices.

In 2021, more medium-sized hedge funds are expected to leverage outsourcing. In the long run, the increase in savings and efficiency will yield serious returns.

On the other hand, however, big hedge funds will look forward to straight-out acquiring them!

More focus on healthcare

The pandemic taught us several big lessons, but one of the biggest, perhaps the biggest, was the importance of investing in healthcare infrastructure.

Naturally, hedge fund managers are now more mindful of healthcare investments. And it is not just the fear of the next pandemic that will drive healthcare growth. The population is aging. We are making tremendous advances in medical technology every day. Then, of course, there is the cash-rich US healthcare sector.

Healthcare“The pandemic taught us several big lessons, but one of the biggest, perhaps the biggest, was the importance of investing in healthcare infrastructure.”

Already constituting some billion-dollar assets, healthcare will surely play a huge role in the hedge fund industry in 2021. 

The effect of regulations

EU regulations stipulate free trade between the nations that have joined hands under its roof. However, when the UK opted out of the EU, the departure now famously called Brexit, they also opted out of those stipulations.

As a consequence, trade with neighbors was not free anymore. The UK, like any other non-EU nation, would struggle with EU regulations.

The result?

The UK’s hedge fund assets were the second-highest in worth in the world. In 2021, the focus is expected to shift to North America. While their assets might still be quite valuable, they won’t be as valuable as they ought to be, as they are expected to lose out given their struggles — extra tax, more paperwork, and other regulatory friction points.

However, not all government interventions are bad.

Given how vague ESG guidelines or materiality assessment is, regulations or standards established by the government might actually be a good thing. And that is what we expect in 2021.

Regulation of the hedge fund industry, for example, would make for fewer liquidity violations, more equality, diversity, clarity, and transparency.

We expect the regulations to make the game much more level.

Top Hedge Fund Industry Trends, 2021


Digital transformation

Automation tools such as Robotic Process Automation (RPA) have revolutionized a great variety of industries. We believe the hedge fund industry is next.

It has been demonstrated time and again that digital transformation brought on by automation, machine learning, AI, and other data-driven technologies has staggering benefits: improved productivity, efficiency, decision-making, risk management, cost-effectiveness, customer satisfaction, scalability, and other qualities that go hand in hand with revenue.

Of course, the hedge fund industry was already transformed. The banking and finance sector, in fact, is the pioneer of data-driven decision-making. What we expect to improve is the scope of their technologies, and hence, capabilities.

Improved technology, for example, will equip the industry to better deal with blockchain or cryptocurrencies. As a consequence, hedge fund managers will be able to create different portfolios whether exclusively crypto or mixed.

Also, most crypto-based hedge funds today are based in the US or UK. In 2021, we expect the movement to spread, as more hedge funds worldwide transform digitally.

Digital transformation, however, is impossible without digital governance, without the right infrastructure. The hedge fund industry, therefore, will not just invest in business intelligence solutions, it will also heavily invest in data governance solutions.

There is plenty to look forward to!