Future of Alternatives 2025: Hedge Funds: Embrace, Adapt, Prosper

As ESG and digital technologies transform the hedge fund industry, Tom Kehoe of AIMA says it’s only by tackling these issues head on that managers will earn a bigger slice of the allocation pie

What does the future hold for the hedge fund industry, given its history of innovation? What kind of products will funds deliver to their investors? How will they reconcile profits with social responsibility? Will hedge funds as we know them even exist, or will they be replaced by machines?

The recent disruption has shown the industry to be highly adaptable and resilient in the face of massive market disruption. We are in the middle of an evolution where hedge funds that innovate and are flexible will become asset managers that succeed and grow. Looking out over the next five years, two significant thematic trends will dominate the outlook for the industry.

Funds Must Embrace Change
Efforts to integrate ESG across investment products will intensify, led by demand from investors and requirements by policymakers. Out of this disruption, we expect to see increased interest in strategies that incorporate ESG and sustainable finance considerations. Sustainability, climate change, and social concerns are now considered core risks and objectives by asset managers and allocators. At AIMA, we strongly believe that alternative asset managers are well placed to deliver double bottom-line benefits: superior investment returns by doing good socially and environmentally, while actively encouraging high standards of governance.

The second mega trend is technology. Every industry in the world is being disrupted or will soon face disruption by technology. The advent of cutting-edge statistical and computational tools is increasingly pushing the hedge fund industry toward a more quantitative outlook. Over the coming years, machine learning and the use of alternative data will become steadily more important for hedge fund firms until it becomes a necessity. 

One thing will remain constant: the success of a hedge fund firm depends on the quality of its most critical asset – its people. Fostering diversity and inclusion is an imperative for all businesses, hedge funds included. Allowing greater innovation and a wider variety of voices to be heard will result in better decisions being made and better investment outcomes. 

The industry will continue to grow because hedge funds still provide the opportunity to source differentiated investment exposure with non-correlated returns. A major rethink on portfolio allocation must surely see alternative investments play a greater role in investor preference, with hedge fund investing being more prominent.

About AIMA
The Alternative Investment Management Association (AIMA) is the global representative of the alternative investment industry, with more than 2,000 corporate members in over 60 countries. AIMA’s fund manager members collectively manage more than $2tn in hedge fund or private credit assets. AIMA draws upon the expertise and diversity of its membership to provide leadership in industry initiatives such as advocacy, policy and regulatory engagement, educational programs and sound practice guides. AIMA works to raise media and public awareness of the value of the industry. AIMA set up the Alternative Credit Council (ACC) to help firms focused in the private credit and direct lending space. The ACC currently represents over 170 members that manage $400bn of private credit assets globally. AIMA is committed to developing skills and education standards and is a co-founder of the Chartered Alternative Investment Analyst designation (CAIA) – the first and only specialized educational standard for alternative investment specialists. AIMA is governed by its Council (Board of Directors). 

For further information, please visit AIMA’s website: www.aima.org

For more predictions and projections on the future of the alternatives industry, visit Preqin's Future of Alternatives 2025 Content Hub.