Critics love to hate hedge funds' relatively high fees, low performance and secrecy. But the industry is managing more money than ever-and is poised to grow even more in 2015.
"Barring a large and unexpected global or financial event, hedge funds are positioned for another year of solid growth," industry data tracker eVestment wrote in a new report.
The company predicts that investors will add about $100 billion or more to hedge funds in 2015, about the same as the $112 billion they added in 2014 to push assets to a record of about $3 trillion.
The new money is mostly coming from big institutions, such as public pensions, university endowments and charitable foundations. Such investors are looking to so-called alternative investments like hedge and private equity funds to diversify their exposure away from already soaring stocks and low-yielding bonds.
While there are about 10,000 hedge funds, the main beneficiaries will likely be large firms that already dominate, like Ray Dalio 's Bridgewater Associates, Dan Och 's Och-Ziff Capital Management Group (OZM) and Cliff Asness' AQR Capital Management.
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The average hedge fund hasn't produced huge returns in 2014, often as part of their risk-conscious design. The Absolute Return U.S. Equity Index, which tracks managers who invest in stocks, gained 3.74 percent net of fees in 2014 through November, but the S&P 500 index (^GSPC) gained nearly 12 percent over the same period. The Absolute Return Credit Index is up 5.71 percent through November; the iShares Barclays Aggregate Bond Fund gained 3.93 percent.
"We need to recognize that the long-term trend, driven by institutional portfolio allocation decisions, determines the industry's growth, while performance determines the near-term distribution of those assets," the eVestment report noted.
Investors and their advisors are trying to figure out that mix now.
Tim Ng, chief investment officer of consultant Clearbrook Global Advisors, thinks the best-performing hedge funds for 2015 will be those that can take advantage of sharp market moves, such as U.S., Europe and Japan-focused stock-picking hedge funds, and differences in government economic stimulus policy, so-called "macro" or "relative value" strategies that trade government bonds, currencies and more.
"Isolate hedge funds that benefit from increases in volatility and divergent central bank policies," Ng wrote in a 2015 outlook presentation.
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Justin Sheperd, CIO of hedge fund allocator Aurora Investment Management, also believes that coming volatility from reduced central bank market involvement will be good for money managers.