Challenges and Innovation in the Hedge Fund Industry

July 18, 2008


New York, NY, USA July 18, 2008

The hedge fund industry is slowly putting the credit crisis behind it, as it looks to new opportunities. Alpha/beta bifurcation and institutional investors’ growing appetite for hedge funds is causing a significant shift in the structural and operational underpinnings of the industry.

Fallout from the credit crisis not only revealed where the weaknesses in the hedge fund industry lie, it also highlighted the ability of some funds to navigate the current environment and vastly outperform the markets and their competition. While the versatile industry is slowly putting the credit crunch behind it, a number of structural challenges remain. In a new report, , Celent examines these challenges and presents a practical view on how the industry responds.

All signs point to the continued institutionalization of large hedge funds. Institutional investors account for an increasing percentage of the client base of hedge funds and pension funds have accelerated their push into the industry. To meet the requirements of these investors, hedge funds have developed a much more mature business model.

Asset concentration among the largest hedge funds largely reflects the changes in capital sources. "Smart money"--endowments or high net worth individuals--are gravitating toward high-profile boutique funds launched by successful portfolio managers which have the potential to generate outsized returns. New money from pension funds is gravitating towards the large, established players with more developed administration and compliance departments.

At the same time, the competition for alpha has been heating up. Circumventing the commoditization trap is one of the biggest challenges for the industry. To this end, hedge funds have become a visible and active participant in the lending business, developed more hybrid capacities and have increasingly sought to build high-capacity / low-latency smart-order routing infrastructures that will allow them to access liquidity faster, reduce market impact, increase speed and reduce trading costs.

"Risk management and operational infrastructure capabilities of large hedge funds have improved substantially. In many cases, these capabilities have begun to resemble best practices across the financial system," says Isabel Schauerte, an analyst with Celent’s Institutional Securities & Investments Group and co-author of the report.

"In fact, some large hedge funds are slowly morphing into structures more similar to traditional asset managers," she adds. 

The 44-page report contains 10 figures and four tables. A table of contents is available online.


Members of Celent's Institutional Securities & Investments research service can download the report electronically by clicking on the icon to the left.  Non-members should contact for more information.


Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is a wholly-owned operating unit of Marsh & McLennan Companies [NYSE: MMC].

Media Contacts

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Michele Pace
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Europe (London)
Chris Williams
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Yumi Nagaoka
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Table of Contents

New York, NY, USA July 18, 2008

Executive Summary 3
Introduction 5
Overview of the Current Market Environment 6
  Hedge Fund Inflows 6
  Performance Data 8
  Hedge Fund Liquidations 10
  Tightening Lending Standards 14
  Industry Responses 15
Permanent Challenges and Industry Responses 18
  The Separation of Alpha and Beta 18
  Industry Responses 19
  New Frontiers of Risk 20
  Industry Responses 23
  Institutionalization of the Hedge Fund Industry 27
  Industry Responses 33
  Growing PR Pressures 36
  Mounting Regulatory Pressure 38
  Industry Responses 38
Conclusions 42


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