The key development for the hedge fund industry was a change in demand from institutional investors. The shift in risk-taking was the overall driver for pension behavior in the last 35 years. This change in risk-taking reduced exposure to fixed income and increased the desire to seek higher-returning investments with a similar low overall risk. This shift is presented in the paper, The Rise of Alternatives.
The shift in risk allocation by pensions and endowments led to a considerable increase in hedge fund demand across all strategies, with two effects. One, money flows into hedge funds increased as expected from any shift in demand. Two, the institutional investors demand greater oversight through their due diligence, which has increased the demand for legal, compliance, and risk management. Hedge funds grew larger, more sophisticated, and more complex in response to this greater demand.
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