Demand for hedge funds is strong and will continue to grow, worldwide back to the top »
As the hedge fund industry matures, institutions such as pension funds and insurance companies will continue to increase allocations, encouraged by higher risk-adjusted returns and low correlation to traditional asset classes. This is a global trend, with the largest increases in allocations expected in North America.

Asset inflows from private clients are also set to remain healthy, albeit as a smaller percentage of an expanding market. Burgeoning emerging markets wealth and a growing mass affluent market in the West are key drivers of this trend. A growing number of private banks are set to increase their recommended allocations to hedge funds.

Hedge funds are pursuing an increasingly broad range of opportunities back to the top »
The strategy ’explosion’ created by the hedge fund industry since 1990 has significantly broadened investor choice.

The quest for new sources of outperformance is as vibrant as ever. Within existing strategies, new models are being incubated; new markets and instruments are being mined to increase capacity; and investment tools and trading technology are being upgraded. Beyond the current range of strategies, new opportunities are emerging in areas such as the mitigation of climate change and the revaluation of natural resources.

With opportunities opening up on a truly global scale, hedge funds with the ability to implement diverse strategies and operate across multiple regions are best placed to benefit.

Concentration of capital looks set to continue back to the top »
Investors are allocating an increasing proportion of their capital to managers with strong track records, solid brands and proven expertise in risk management and client service. By concentrating capital with established market participants, investors benefit from the advantages of scale. Large scale players are able to:

• provide a broad alternative product range;
• devote significant resources to risk management, due diligence and research;
• adapt to changes in regulatory regimes;
• provide high levels of customer service, from tailored portfolio construction and structuring capabilities to reporting and transparency;
• provide support for investment staff, to enable them to focus on their key skills;
• excel at trade execution by using bulk purchasing power to secure premium access, service and capacity from the market; and
• withstand market turbulence and reductions in liquidity.
  

Established funds at their best marry boutique alpha creation with institutional infrastructure. Over time, this is likely to reinforce the trend towards concentration and consolidation across the industry, to present opportunities for fund principals to monetise their holdings, and to increase barriers to entry.

Established, large scale players will be best placed to exploit new opportunities back to the top »
To secure first mover advantage and scarce capacity in new, uncrowded investment areas, hedge funds need to devote large-scale research resources to develop and test new strategies. Well-funded, stable businesses are more likely to provide the ’patient capital’ needed to fund research into new sources of outperformance. They are also able to build the profile necessary in the research community to attract and retain high calibre talent. In short, scale is a friend of alpha.