Hedge Fund Trends 2024

The hedge fund trends for 2024 will be shaped largely by a prevailing sense of optimism and bullishness in the markets, influencing investment decisions and how hedge fund managers themselves run their businesses.

For hedge funds, the last few years have been a wild ride: the COVID-19 pandemic at its peak, supply chain disruptions, inflation at 40-year highs, social issues, and rising geopolitical conflict.

Add in rapid and disruptive advances in machine learning, and you have a prolonged and heightened sense of market uncertainty.

Beyond those factors, workplace culture, business models, and society as a whole continue to change. With all this in mind, fund managers must rethink their strategies for investing and attracting clients.

Below are some of the trends to watch for 2024.

13 Hedge Fund Trends to Watch

1. Renewed Optimism

Despite headwinds, 2023 turned out to be a banner year for the hedge fund industry.

A recovering and rising stock market last year brought increased returns for hedge funds in general, but the larger ones in particular performed well.

The world’s 20 must successful hedge funds enjoyed record profits, creating a combined $67 billion for investors.

And this optimism is carrying over into 2024.

2. Hedge Fund Industry Growth and Opportunities

The hedge fund market size (in terms of AUM) was recently valued at a record $5 trillion, underlying the bullish sentiment among fund managers and investors alike.

  • By 2032, the total market value is expected to top $7.1 trillion.
  • The number of billion-dollar hedge fund startups rose to pre-pandemic levels.
  • New hedge fund launches exceeded liquidations in 2023

With a globally rising high-net-worth-individual (HNWI) population, this wealthy demographic will look to invest beyond traditional means, and they will bring a source of capital that fund managers greatly want to attract.

And as assets under management grow for hedge funds, they will enjoy greater prestige and market exposure, allowing them to strengthen and diversify their investment expertise, thus generating more business and more profits.

And with that all growth comes a need for hiring the best hedge fund management and supporting talent.

3. Competition For Hedge Fund Talent Heats Up, Consolidation to Look Out For

"You're seeing Tom Brady-like pay packages."

"You're seeing Tom Brady-like pay packages.”

With money pouring in and a finite talent pool in the industry, top performers will get paid like“star athletes,” as Business Insider described it.

Hedge fund giant Millennium was offering guaranteed pay as high as $60 million, and a senior portfolio manager at another firm was given a deal worth $120 million.

Simply put, there isn’t enough talent to go around, and larger hedge funds will go as far as acquiring smaller shops if necessary to get that talent. Thus, consolidation of firms will be an area to watch in 2024.

4. Multi-Strategy Funds Are the Big Winners

Multi-strategy, multi-manager hedge funds were standouts in 2023 for delivering higher than average returns.

Instead of relying on one expert stock picker and making highly risky bets, the multi-manager approach employs an “army” of fund managers who specialize in different asset classes and strategies.

Large hedge fund management firms  like Citadel go with this approach, and their annual returns ranged from 15% to 38% over the last 5 years.

5. Merger & Acquisition Bets Fall Flat

“This is the craziest environment I think anyone has ever gone through. It’s not just hostile to deals but it’s particularly unpredictable.”

In spite of industry growth, not all strategies have succeeded.

M&A transactions were the worst performing of hedge fund strategies in 2023, losing 2% on average. Should deal volume remain low in 2024, this strategy will continue to underperform.

For this approach, merger arbitrage traders will buy stakes in companies they expect to be acquired, and afterwards, they expect shares will be sold at a higher price.

But when the deals fall apart, there are no gains to reap.

And it’s not just fewer deals, but traders blame regulatory bodies for preventing the M&A deals from happening.

According to one trader:

“The regulatory environment has been so tricky and the deals have taken a turn. It hasn’t been very pretty.”

6. Hedge Funds Increase Allocation to ESG

According to UBS, hedge fund managers are increasingly incorporating environmental and social metrics into their investments.

With lower interest rates forecasted in 2024, ESG will increase its appeal to the investment industry, as green assets are projected to recover after suffering losses in the prior year.

With Federal Reserve rate cuts leading to a potential “soft-ish landing,” UBS analysts believe increased confidence in areas of sustainability will follow.

7. Lower Fees Remain the Norm, but Creative Fee Structures Arise

The 2 and 20 model was once an industry standard, but those days are long gone for most firms.

And according to one report, more than 50% of hedge funds’ management fees were at 1.5% or less.

In this climate, fund managers have developed innovative fee structures, ones that “balance performance incentives with changes in operating models and a broadening view of investor benefits.”

Fund manager and investor interests will align around performance, but when it comes to co-investment opportunities, there may be longer lock-ups in return for fee discounts and, increasingly, even passing on operational costs, are some of the ways in which fund managers and investors find alignment and agreement.

8. Investors Want Fees Tied to Performance

According to a BNP Paribas survey, 66% of investors prefer hurdle rates, which means investors pay certain fees only when performance goals are met.

With more than 15,000 hedge funds globally and many struggling with underperformance, investors know they have options and leverage. Fund managers compete for investment capital by lowering fees as a result.

At the end of the day, it’s all about performance.

Funds that consistently outperform will lead to happy investors, and word will spread. In that case, fund managers can demand higher fees.

9. Diversity and Inclusion in Mind, ESG Gains Ground in the Workplace with Room for More Improvement

According to research from the Knight Foundation, only 1.4% of total US-based AUM was managed by diverse-owned firms in 2021, representing 0.4% growth from 2016.

And currently for hedge funds, 3.4% of US-based AUM is managed by minority-owned firms and 2.2% is managed by women.

And these numbers, small as they are, represent some progress, but not enough, according to investors.

Investors themselves are calling for improvements in DE&I (diversity, equity, & inclusion) for hedge funds.

According to a BNP Paribas study, investors are investing in women and minority-led funds 21% more than they were five years ago, with more growth for the future.

Indeed, hedge funds are starting to feel some “pressure” but in a positive way, as there are benefits by focusing on DE&I and ESG.

Robert Howe, a principal at Mercer Advisors, shared his take:

“Just from a research point of view, cognitive diversity is great in an investment process. You have people from different backgrounds and with different mindsets who therefore challenge each other and ultimately make the better investment decisions.”

Jamie Kramer, head of alternatives solutions group at JP Morgan Asset Management, shared her view:

“If you tell hedge funds and institutional allocators that they’re missing out on superior returns and opportunities, purely because they’re not hiring from the biggest universes of talent, it could help to create this momentum and drive to invest in diverse fund managers.”

10. Flexible Work Models Are the Norm

Remote work became commonplace when lockdowns started during the COVID-19 pandemic.

Employees grew accustomed to no longer commuting for long times or distances every day, and many can’t imagine returning to an office five days a week.

The hedge fund industry has been no exception to this phenomenon, with company leaders finding their own approaches. While workplace flexibility is greater now than it was pre-pandemic, some company leaders take a more “strict” approach.

CEO Ken Griffin of Citadel has required all staff back in the office full time since 2021, which he cites as one of the reasons the firm has been so successful, generating a record $16 billion for clients in 2022.

Another example is CEO Bill Ackman of Pershing Square. He believes in staff being in the office five days a week, but with some variation:

“What we’ve done at Pershing Square is bring people back five days a week 10 months a year. Of course if there’s something you need to do like a doctor’s appointment or working from home one day, use your best judgment. And then we give people July and August to work from anywhere with the caveat that if there’s something where we need to bring everyone together, you show up.”

11. Leveraging AI to Beat the Markets

Machine learning made a big splash in late 2022, as hedge funds and others seek to leverage the technology, albeit with reservation around risks.

Beating the market is one way hedge funds try to use artificial intelligence, and one hedge fund in Toronto is trying to do just that.

CEO Adrian de Valois-Franklin of Castle Ridge Asset Management created a supercomputer called Wallace.

With Wallace, Valois-Franklin says the system has “an ability to constantly refine its own models using evolutionary processes that have been likened to selective breeding.”

The machine generates thousands of differently-weighted virtual investment portfolios each day, and those portfolios are tested and ranked based on their suitability to current market conditions.

In eight-hour cycles, Wallace will pick out its top-performing portfolios and gives them priority to “breed.”

While AI is by no means a perfected technology, and risks - including with a system as powerful as Wallace - still exist, advances in machine learning will continue, and hedge fund managers should keep a finger on the pulse of their developments.

12. Digitization Is Key

Download Our Automation Guide for RIAs

AI is one piece of the puzzle, and more importantly, hedge funds need to think about digitally transforming their entire setup.

To stay competitive, hedge funds need to make full use of technology, optimizing efficiency in all processes, including (but not limited to):

  • Reporting and data analytics
  • Investment research
  • Trading
  • Data migration
  • Application development
  • Software implementation
  • Client communication
  • Regulations and compliance

Empaxis believes strongly in digital transformation for investment management, and we help hedge funds leverage best-in-class technology for the support they need.  

13. Outsourcing Hedge Fund Functions

Download Our White Paper, Making Outsourcing Work

As the hedge fund industry continues to grow, quality talent is needed not just in trading, investment research, or portfolio management.

Fund managers will also need experts in IT, operations, accounting, and compliance,

But recruiting, hiring, training, and managing that talent can be a real challenge and quite costly to take on in house.

Hedge funds can outsource those functions to a third party like Empaxis, which has the capabilities to support fund managers in:

  • middle- and back-office servicing
  • compliance with 13D and 13F reporting automation
  • margin calculations
  • accounting functions (AR, AP)
  • systems integration and digital transformation    

According to speakers at a conference for HedgeweekLIVE North America, the COVID-19 lockdowns accelerated the trend toward outsourcing for hedge funds.

Alex Prylucki, managing partner for the investment advisory consulting firm LEVVR, pointed out that the benefits of outsourcing are a lot greater than any one single individual a firm can hire.

He also added that with outsourcing, firms can take advantage of time zones difference for outsourced activity. For example, US hedge funds can have trade reconciliations done overnight in Asia, which Empaxis can do.

Similarly, hybrid model outsourcing makes it possible to access talent not only offshore, but onshore.

If hedge funds require servicing done within their own country like the US, they can leverage Empaxis in that area as well, in partnership with MD Solutions.

The Future for Hedge Funds

The hedge fund outlook for 2024 shows a lot of promise.

And to be successful, firms must run most effectively not only in terms of investment strategies, but also in hiring approaches, workplace culture, and making use of technology.

Similarly, hedge funds must continue mitigating risk when it comes to market volatility, costs, and new and disruptive technologies.

Hedge funds can do a lot, but they can't do it alone, nor should they. When it comes to those challenges, Empaxis has solutions.

Chat with an Expert

Get the latest in financial technology support, AI and digital transformation and investment operations outsourcing

Our monthly newsletter features helpful resources, articles, and best practices to implement within technology providers and investment firms