The 2010s brought about major changes in how the hedge fund industry was regulated. Previously, the sector had largely avoided regulation; for example, Jones avoided the requirements of the Investment Company Act of 1940 by restricting the number of investors in his limited partnership to 99 or fewer.
The Dodd-Frank Wall Street Reform and Consumer Protection Act
came into effect in the early part of the decade in direct response to the GFC, leading to greater requirements for registering and reporting to the SEC. In Europe, the Alternative Investment Fund Manager Directive (AIFMD
) forced hedge funds to upgrade their compliance and operational frameworks. The Volcker Rule
, which prohibited banks from certain investment activities and their ownership of certain alternative asset funds, led to an influx of new funds as prop-traders (traders using the firm’s money instead of external funding) spun out of hedge funds. The net result of these and other regulations (e.g. MIFID II) was that barriers to entry and competition grew as the hedge fund sector professionalized and institutionalized.
Despite increased scrutiny from regulators, hedge funds rebounded well from the GFC, with industry assets exceeding $2tn again in 2011 and exceeding $3tn as of 2019. Even so, the sector was affected by negative perceptions of performance and fees over the latter half of the 2010s, and several high-profile investors (notably CalPERS – the US pension fund) pulled their investment.
The industry is still responding to regulation and an evolving investor client base. Gone are the days of the 1980s and 1990s when funds could operate in spare rooms with a laptop and phone. Today, hedge funds focus on providing a solution rather than a product, as managers work with increasingly sophisticated and discerning clients. To discover the assets under management in hedge funds by region in 2020, explore the map below.