Opportunities and Challenges for Hedge Funds in the Coming Era of Optimization Part 2: Changes Driven by Regulation (Citi)

June 2014

KEYWORDS: optimization, regulatory reform, hedge funds, Institutional Investors, rulemaking, Global, 40 Act liquid alternative funds


Citi Prime Finance

  • Citi

The factors driving change in the hedge fund industry are shifting. For the five years since the Global Financial Crisis (GFC), major industry evolution occurred primarily in response to a shift in the investor base.
Part I of this year’s survey explored the circumstances that caused institutional investors to emerge as the industry’s main source of capital and how demands from this audience changed key structural aspects of the market. In turn, these structural changes allowed for expanded understanding of hedge fund strategies, the broader placement and use of hedge fund managers in the core of institutional portfolios, and the emergence of a multi-tiered industry structure in which different profile hedge funds face off to unique investor audiences. The continuation of these trends is likely to help drive the amount of assets being managed by hedge fund firms from $2.9 trillion in 2013, of which $305 billion is in liquid alternatives, to $5.9 trillion in 2018, of which $977 billion will be in liquid alternatives.
Throughout this period of change, a broad and significant set of global regulations was being formulated. The complexity and scope of the rule-making has allowed these programs to hang over the market for the past several years without significantly impacting much of the day-to-day hedge fund activity.
Yet, with major implementation deadlines upon us or looming, these regulatory drivers are now becoming the predominant force of industry change.

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