"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 and Cliff Asness' AQR Capital Management.
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 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.
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.
"The combination of low intra-stock return correlation and increased dispersion of returns should create greater investment opportunities for hedge fund managers," Sheperd wrote in a recent outlook piece compiled by Natixis Global Asset Management.
Alexander Healy, director of strategic research at investment manager AlphaSimplex Group, was also optimistic on hedge funds in the new year given the likelihood of increased volatility.
"Given the uncertainty around equities and bonds, we believe that alternative strategies, particularly those that are dynamic and can effectively manage risk, will be a more important part of investors' portfolios in 2015," he said in the Natixis outlook.
Sheperd and Ng also recommended so-called event-driven hedge funds that can take advantage of corporate events given the likelihood of more mergers, acquisitions, management changes and the like.
Activist managers, a subset of those funds, scored a series of high-profile wins in 2014.
Notable successes included Pershing Square Capital Management's bet on Allergan (which was sold to Actavis and netted Bill Ackman's firm about $2.2 billion); Starboard Value's involvement in Darden Restaurants (it took over the board with all 12 seats, and the stock has gained since); and Icahn Enterprises' play in Family Dollar Stores (the company is in the process of being sold, and Icahn netted a reported $200 million profit).
Those victories came as the average event-driven fund gained just 2.56 percent through November, per the Absolute Return Event Driven Index.