Once the province solely of institutions with considerable heft, hedge funds are evolving to address new investor dynamics as they face continued scrutiny, according to The Cerulli Edge—The Americas Asset and Wealth Management Edition.
Hedge funds have experienced a rebound following a poor exit market in 2022 and 2023. The global hedge fund ecosystem grew 9.3 per cent in 2024, Cerulli writes, mainly as a result of performance, given the USD2.7 billion of inflows driven by credit and multistrategy funds.
“Hedge fund managers historically have found success working with institutional investors and ultra-high-net-worth (UHNW)/high-net-worth (HNW) investors. As a result, they have delivered their strategies through limited partnerships and other structures that offer greater customisation (e.g., separately managed accounts, funds of one).”
According to Cerulli, the key objectives of hedge fund investment strategies are overwhelmingly focused on volatility dampening (79 per cent) and diversification (71 per cent), followed by growth/enhanced returns (50 per cent).
However, the fees of such strategies remain a point of concern, as investors can earn close to a 4 per cent yield on cash. Cerulli believes hedge funds provide an important value proposition, but it is evident that a significant component is the ability to deliver unique client outcomes at an attractive price.
“The key question is whether the largest funds can maintain performance to justify the fees and whether their strategies can support more assets, as some return capital to investors,” says Daniil Shapiro, director. “The concern is not new for hedge funds, whose trading activities often have drawn scrutiny, but they hint at the importance of investor oversight and monitoring of the strategies to ensure understanding of the exposures, to confirm that they deliver value,” he adds.
Vehicle innovation will be critical to future flows, the firm says. “The limited partnership structure and other structures that offer advanced customization may require closer consideration as investors seek greater liquidity and fee transparency,” adds Shapiro.
The research cites the entrance of two of the largest hedge fund firms entering the exchange-traded fund (ETF) as a point of reference. “The distribution landscape is changing. Hedge fund managers should carefully evaluate the opportunity to offer more liquid strategies—if not via the ETF structure, then via the semi-liquid structures. Brand name hedge funds are likely to have an opportunity to offer their strategies through structures with easier reach to financial advisors,” he concludes.
