Top Hedge Fund Industry Trends in 2023

In the past few years, market volatility—driven by the pandemic, geopolitical tensions, and various supply chain issues—has had a profound impact on most industries, from corporations to consulting agencies and financial institutions. Hedge funds are no exception. But unlike most other industries, hedge funds cannot use a market downturn as an explanation for poor performance.  

Hedge funds make alternative investments and perform trades from pooled investment funds. They exist to generate alpha, even—and perhaps especially—when the market is down. 

Hedge funds differ from other investment companies in certain key ways. Unlike private equity firms, they allow investors to pull out capital depending on the valuation of assets, and are less regulated than mutual funds or exchange-traded funds (ETFs). 

Also, unlike most other investment companies, hedge funds are expected to bring in solid returns no matter the wider market landscape conditions. And yet, the last few years have been a mixed bag for hedge fund performance—while some have consistently outperformed the market, others struggled to stay resilient amidst unpredictability.

Increased competition in the hedge fund industry has caused tightening of performance and management fees, while increasing the pressure on each hedge fund.

This begs the question: what differentiates funds that can deliver in this high-stakes environment from those that come up short?

The answer: digital transformation. More specifically, it’s a firm’s ability to adopt and leverage new technologies that are changing the investment landscape. Those that can do this successfully gain a competitive edge, navigate change with confidence, and generate the best returns for clients.

Below, we explore 9 of the most timely and critical trends impacting the hedge fund landscape in 2023 and beyond. We also cover key technologies your firm needs to know about, the issues clients expect you to prioritize, and new ways to optimize growth strategies.

9 Global Hedge Fund Trends

Technology Tools are Top Priority

Digital technology has shifted from a support resource to the foundation of how all businesses function. For hedge fund managers, the speed and scope of tools like market intelligence, financial research, and data analytics platforms directly correlates to their ability to keep pace with market events and new opportunities.

These tools also uplevel the human innovation potential at firms by powering fast, scalable due diligence processes that quickly get analysts the insights they need so they can spend their time coming up with strategic ways to make them actionable.

In recent times, generative AI (genAI) has become a particularly hot topic across all industries. With its promising applications in market research, firms are looking to harness the power of genAI in their workflows to increase efficiency, effectiveness, and competitiveness.

Looking toward the future, a tech stack complete with automation, artificial intelligence (AI), machine learning, and advanced analytics features will become table-stakes for hedge funds to stay competitive and agile.

Quality Data Drives Alpha

The internet and mass data democratization has rendered public-source material essentially obsolete for today’s hedge fund analysts. To find real strategy-driving insights, analysts now must go beyond what’s available in the news and on consumer-grade search engines, accessing premium and exclusive sources that can drive alpha-generating decisions.

These sources can include private company documents (ex: earnings call transcripts), regulatory filings and disclosure, broker research, and expert interview transcripts.

The firms that will win most in the future will be those that make data an integrated, foundational part of their decision making process—whether using automation features like real-time alerts to stay informed or AI capabilities like semantic search to accelerate their research process. 

Clients Want Personalization

The trend of clients wanting and expecting personalized experiences and services is no longer limited to just the consumer space. Clients now expect the same level of customization when they work with hedge funds as well. 

Recent research from Schwab Advisor Services found more than half of investing clients expect portfolio personalization to increase in the next five years. Institutional investors in particular have elevated expectations for how their investments will align with their unique financial goals, ethical values and beliefs, risk tolerance, and more.

The catch: Personalization has been historically challenging to scale.

But technology advances have changed all that. Today, fund managers can use CRM platforms to centralize customer data and build 360-degree views of their clients, and then leverage AI tools and capabilities to design custom-built investment strategies for each client.

As increased industry competition puts pressure on hedge funds to lower performance fees, the ability to deliver these kinds of hyper-personalized services serves as a key differentiator and revenue generator, helping firms to win new clients at a higher rate.

ESG as an Alpha Generator

Over the recent years, ESG has become a key pillar in investors’ strategies for investments and acquisitions, and it’s clearly not a passing trend. Investors are heavily scrutinizing corporations for their ESG commitments, discerning those that put their dollar where their mouth is from those that are only trying to appear as though they are following ESG best practices.

Even with how much of a priority ESG has become for investors, it has taken a while for hedge funds to fully integrate it into their growth strategies. Many hedge fund managers initially saw ESG as just another box to check off while looking for real growth opportunities, but their sentiment has changed. 

Barclays reports investor preference as one of the top two drivers behind the increasing ESG allocations in hedge funds, and the majority of hedge fund managers now see ESG as a bonafide alpha generator.

Looking ahead, ESG investments should be treated as equally high-potential alpha generators to any other investment in the hedge fund portfolio. Those that approach ESG with the same rigor as other priorities will be better able to win over investors by proving they can deliver high returns while staying in tune with value-centered priorities. Additionally, with the current lack of a clear hedge fund leader in the ESG space, there is tremendous opportunity to gain the competitive edge by responding to investor demands.

Regulatory Standards are Changing Fast

Hedge fund-related regulatory standards have seen a sweeping number of updates and changes in recent years, from stricter SEC-led reporting requirements to new EU legislation designed to protect investors and increase transparency. With evolving regulatory and compliance standards now being an unavoidable reality, having the necessary tools in place to stay agile is critical.

Features like automated alerts and AI-curated news summaries can help hedge fund managers stay up to speed on key regulatory changes without requiring time-consuming manual research. At the same time, with better ongoing knowledge of relevant regulations and standards, fund managers can more easily stay compliant without sacrificing alpha potential.

Deglobalization Upvalues Geographic Diversification

Throughout the 1990s and 2000s, technology-driven globalization led to massive growth in cross-border trade and higher global market correlation. Over time, it has reduced return power behind geographic diversification in investment portfolios.

But in 2023, despite continued acceleration of technological advancement, de-globalization is at the forefront of market trends. Over the past 10-15 years, there have been several significant financial, political, and ethical considerations driving this trend.

In 2008 the global financial crisis led to a worldwide refocus on protectionism, as well as a more careful approach to cross-border trading. In 2015, the de-linking of China’s RMB from the U.S. dollar led to greater separation between the gargantuan Chinese economy and Western markets.

Then in 2020, the COVID-19 pandemic showed a great disparity in domestic policy responses from countries around the world that are still having a financial impact years later.

The bottom line: Diversity throughout global economies is alive and well, and geographically diverse allocations have bigger potential to drive growth for hedge funds now than any other time in recent history.

Remote Work Makes Cloud-Based Collaboration Key

From a more practical perspective, investment firms have had to rethink the way they operate on a day-to-day basis. Even the most traditional industries, finance included, have felt the major shift toward more flexible remote and hybrid work environments.

To retain top talent, hedge fund firms must also embrace this reality. And to stay operationally effective, they need centralized research tools where employees can collaborate and access the same real-time data as their colleagues.

Cloud-based platforms (like AlphaSense) enable more productive modern work environments with powerful in-platform collaboration tools and export capabilities for data that needs to be manipulated and/or shared via other communication channels.

A centralized source for research and data means your team stays on the same page even when they aren’t in the same location, something that will only become more common in the future.

M&A Still Presents High-Alpha Opportunities

After record highs in 2021 amidst low post-pandemic interest rates and the Federal Reserve’s quantitative easing program, M&A deal volume fell significantly throughout 2022, then hit its 10-year low for single-quarter volume in Q1 2023.

But all is not lost for hedge funds with high allocations to M&A. Interest rates will likely reach their peak in the coming months before dropping in 2024, and M&A activity is expected to reach a more balanced state soon, marked by a healthier level of mid-market deals rather than blazing mega-deals that capture tons of attention.

The key takeaway here is that event-driven hedge funds like merger arbs cannot only depend on traditional due diligence methods to identify alpha-generating M&A opportunities. In an unpredictable market, it’s more critical than ever to have the capability to pinpoint the best deals in any conditions.

Related Reading: 5 Crucial Due Diligence Questions to Consider 

Market intelligence platforms like AlphaSense deliver the capabilities firms need to make this a reality. Customized watchlists, automated alerts, and AI-powered analytics features pull the most important insights from structured and unstructured data, enabling firms to be first to see and pursue potential new opportunities, while never missing a critical update.

Blockchain and Cryptocurrency Gain Momentum

Hedge fund activity around digital assets such as blockchain and cryptocurrency has been a mixed bag in the last year and into this year. PwC reports that while the number of traditional hedge funds investing in crypto fell by nearly 10% between 2022 and 2023, no traditional hedge funds plan to decrease their crypto exposure this year.

At the same time, in response to growing U.S. regulations around crypto activity, some funds are considering relocating to other locations where regulations aren’t so stringent.

For those traditional hedge funds that have not already invested in crypto, lack of clarity around future regulations and the collapse of crypto asset service providers (like FTX in November 2022) has made them more hesitant to enter the space.

However, from an overarching perspective, it’s likely that hedge funds will play a larger role in the crypto space once operational and regulatory obstacles abate, correlations between cryptocurrency and other asset classes decouple, and as future markets expand to other blockchain opportunities. 

Hedge Fund Strategies

Considering the key trends we’ve covered above, the following are some of the main strategies we can expect to see from hedge funds in the coming months: 

Accelerated Digital Transformation

Hedge fund firms that haven’t already gotten on board with digital transformation will now have no choice but to embrace it if they want to remain competitive. At the top of the priority list will be investment research tools that automate and scale the due diligence and data analytics processes, giving firms smarter, faster insight into investments with alpha potential, as well as improved risk management processes.

Customized Offerings

Hedge fund firms will take a page from the corporate playbook and build out target customer frameworks so they can offer more tailored investment strategies and solutions. They’ll lean on the tools they implemented in their digital transformation efforts to know their clients better and provide end-to-end experiences that align with their unique values, preferences, and goals.

Geographic Portfolio Expansion

As deglobalization trends continue, hedge funds will pursue more global diversification. In 2023, while China is seeing investors retreat after its first slip in hedge fund activity in a decade, other top emerging markets, like India and Brazil, will be at the forefront of diversification strategies.

Revamped ESG Strategies

While most hedge funds have ESG representation in their portfolios to some extent, we expect it to take an even more foundational role in investment strategies and goals. With responsible investing becoming such a key focus in the financial world, hedge fund managers will be looking beyond simply increasing assets under management (AUM) or identifying new opportunities and risks. They will now need to take on the responsibility of becoming stewards of their assets, ensuring that their values align with those of the investors they seek to serve. 

Growth in Remote/Hybrid Work Environments

Going forward, we expect to see firms increasingly adopt hybrid and remote work environments to attract top talent and retain high-performing employees at a higher rate. With employees in many industries increasingly preferring these formats and even rejecting opportunities that don’t offer remote or hybrid options, firms will have to look for ways to both satisfy employee preferences and meet their operational needs.

Cloud-based platform tools and innovative collaboration tools will be instrumental in achieving this—they enable anywhere-access and create engaged, interactive teams even when members are not in the same physical location.

M&A Pursuits as Differentiators

Unpredictable M&A markets will make allocations in this area an even bigger differentiation opportunity for hedge funds in the near future, with those that refine their ability to identify high-potential opportunities and pursue them quickly gaining an edge.

For merger arb funds and others with high M&A allocations, market intelligence tools will be a competitive imperative going forward.

Increased Blockchain and Crypto Investment

The strategy for most hedge funds in crypto investment—at least for now—will be to wait and see. While it’s likely safe to say that the number of hedge funds exposed to crypto will slowly but surely climb in coming years, recent regulatory changes and market events have underscored the need for many firms to get more educated in this space.

Increase in Defensiveness

Hedge funds are increasingly adopting defensive strategies, a sign of stability. Multi-strategy is one popular approach—a portfolio that combines several different single hedge fund strategies such as long/short equity, relative value, and event-driven strategies. Market neutral and sector-specific strategies are also seeing tremendous growth, and are expected to remain favored.

Outlook for H2 2023 and Beyond

Will hedge funds maintain their place as leaders in finding needle-in-the-haystack, high-alpha opportunities? With a continual eye toward the future and tools and technologies in place to inform action, all signs point to yes—the macro outlook for hedge funds forecasts continuous growth and outperformance. In fact, 2023 is expected to be a record year for growth due to net inflows.

But unpredictability in the markets, geopolitical events around the world, economic volatility, and faster-changing trends mean that hedge fund managers must be more adaptable and agile than ever before to protect capital and generate alpha.

The differentiating factor between those that succeed and those that fall behind will be tech- and data-driven capabilities enabled by digital transformation.

For hedge funds that want to stay on the pulse of the trends we covered, as well as be first to know of any emerging trends, the time is now to implement market intelligence and automation tools that will uplevel your strategies and give you the competitive edge. 

Stay Up to Date with AlphaSense

AlphaSense is the leading financial research platform servicing 75% of the world’s top hedge funds, as well as 85% of the S&P 100 and 97% of the Dow 30. In 2023, AlphaSense was named to the Forbes AI 50, which recognizes the top AI-based companies globally.

The AlphaSense platform comes with a massive content library of over 10,000 public and private data sources. They include:

  • Regulatory filings and disclosures from 68,000 companies
  • Reports from 1,500 top research providers
  • Top-tier newspapers, journals, and other media sources
  • Insights from 1.4 million private companies
  • Regulatory updates from global health and energy organizations
  • 30,000 proprietary expert interview transcripts

The AlphaSense platform also delivers unmatched AI search capabilities for analyzing qualitative and quantitative research, and mining unstructured data for the most critical insights, including:

  • Automated and customizable alerts for tracking companies, industries, and potential investments
  • NLP-powered sentiment analysis, semantic search, to scan text documents and uncover overall meaning and top insights
  • Smart Synonyms™ technology that ensures you never miss a source important to your research
  • Smart Summaries, our first generative AI feature, summarizes key insights from earnings calls for faster analysis

For hedge fund firms looking to get ahead, AlphaSense is the most comprehensive tool on the market for accessing top data sources and enhancing due diligence with the most cutting-edge capabilities available.

Read more about how AlphaSense is helping hedge funds generate more alpha, uncover crucial insights, and dive into new investment territories:

See all that AlphaSense has to offer and explore firsthand how it can help your hedge fund firm transform. Start your free 2-week trial today.

Nicole Sheynin
Nicole Sheynin
Content Marketing Specialist

Fueled by empathy-driven storytelling and good coffee, Nicole is a content marketing specialist at AlphaSense. Previously, she has managed her own website/blog and has written guest posts for various other publications.

Read all posts written by Nicole Sheynin