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Are hedge fund experiencing a revival?

Hedge fund managers may still speak in wistful tones of the hedge fund industry's once golden age. It was an era of audacious bets, outsized returns and seemingly limitless potential, not to mention outrageous fees.

But as the dust settled from the 2008 financial crisis, having gated their investors to prevent them from leaving, a new reality began to take shape. The once-explosive growth in fund launches slowed to a trickle, and the industry found itself at a crossroads.

Take a look at the chart below from Bloomberg. In the ultra-low interest rate environment that followed, paying for alpha became a tough sell. It became easier and cheaper for investors to buy the index as markets experienced huge amounts of asset price inflation.

Today, a new breed of hedge fund manager is emerging, keen to redefine their role in the financial ecosystem. The story of hedge funds is no longer one of unbridled expansion, but of adaptation and survival in an ever-changing landscape.

With strong performance from US-based funds over the past three years and growing interest from pension funds looking to balance risk and returns, the industry is showing signs of renewed vigour.

This shift is having an effect on multi-strategy funds, which are leading a wave of new launches, particularly in Europe, the Middle East, and Africa, where recent performance has been robust.

While equity-focused hedge funds still dominate institutional allocations, there's a growing recognition that diverse strategies like macro and relative value could offer better risk-adjusted returns. This shift, coupled with increased capacity from new fund launches, suggests that hedge funds may be regaining their appeal as a source of uncorrelated absolute returns in an uncertain investment landscape.

Source: Bloomberg

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