A New Era for Hedge Funds

A decade of scale

“Some of today’s largest hedge fund managers have delivered exceptional alpha for clients,” said Raffaele Savi, Global Head of BlackRock Systematic. “That marks a significant shift from what had once been the conventional wisdom that ‘smaller is better’ in hedge funds."

“Advances in risk management, implementation, and trading internalization are accelerating in the power of scale in hedge funds,” said Savi.

The factors that can make scale a competitive advantage in the technology industry are also at work in the world of active investing. Larger hedge fund managers can access sophisticated risk, trading, and research systems that smaller managers simply can not replicate.

“Cars aren’t any faster today than they were 20 years ago; they’re safer. That’s how today’s investment management industry has evolved,” he noted.

Hedge funds in new places

Allocators were an important and vocal part of the conference, sharing their outlook on the hedge fund industry, as well as how they fit the investments into their portfolios.

“We’re staying focused on hedge funds, simply because the opportunity cost of ignoring them is too high,” said Reginald G. Sanders, Director of Investments for the W.K. Kellogg Foundation. “We see them as essential for diversification, and we consistently try to seek out the strategies that aren’t being discussed.”

At the same time, there were some larger trends that allocators were seeing – and implementing – firsthand.

“Hedge funds are a core part of our risk-mitigation. These strategies may not always stand out when markets are up. But they play an important role,” said Phil Zecher, Chief Investment Officer at Michigan State University.

^{From left: Larry Fink (Chairman and Chief Executive Officer, BlackRock); Rich Kushel (Head of the Portfolio Management Group, BlackRock); Yaki Tsaig (Research Scientist, BlackRock); Raffaele Savi (Global Head of Systematic, BlackRock); Alister Hibbert (Head of the Strategic Equity Team, BlackRock)}

AI’s impact on hedge funds

Technology has always been an important aspect of the hedge fund industry, notably among quant strategies. But developments in machine learning and AI are playing a bigger role in how more funds identify investment opportunities.

“We’re using more LLMs (Large Language Models) to test market sentiments about specific securities, regions or possible macro outcomes,” said Stephanie Lee, co-lead of the Systematic Equities Macro group within BlackRock’s Systematic investment team.

The opportunities for using AI to seek to generate alpha are still only in the early phases. One especially promising application noted by Lee is using AI to translate fiscal policy – and potential changes in policy – into existing quant models. And there are ways to mine existing collections of alternative data to gain insights into things like sales momentum and operating costs, she said.

Clarity and precision

Throughout the day, BlackRock investors spoke with clients and allocators across the hedge fund industry on subjects that ranged from navigating geopolitical uncertainty, to novel sources of alpha, to risk management, to the ramifications of new technology, and more.

It was an informative day for all involved, one that reaffirmed many of the elements BlackRock focuses on in our own hedge fund practice, such as: the enlarged opportunity set for active strategies in the new market regime; the importance of scale and access in seeking to generating alpha; the competitive advantage of a robust technology platform and the role hedge funds can play in clients’ whole portfolio solution.