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Due to current market conditions and unprecedented changes in the regulatory landscape, many hedge funds will be forced to close. Watson Wyatt also expects there will be significant consolidation among the funds that remain.

But experts at Watson Wyatt predict that the best hedge fund managers in the industry will emerge from the crisis better positioned to exploit investment opportunities characterized by greater market dislocations and lower prices. Long-term investors are also likely to benefit from this evolution due to improved fee structures that better align the interests of institutional investors and hedge fund managers.

A number of factors should help certain hedge funds in the future, including: increased opportunities as a result of recent market dislocations; lower competition as the number of hedge funds declines; a reduction in the overall level of leverage; fewer competitive proprietary trading desks; and lower fees making them more attractive to investors. These factors will have different impacts on hedge funds depending on the range of strategies they use.

Pension funds looking to invest in hedge funds should hold off until there is greater stability and current redemptions play their way through the system. Those that are already invested should not take any action, although there might be fund- and manager-specific considerations that will require extra vigilance.