If 2013 was the year postcrisis financial regulations transformed the hedge fund industry’s strategic landscape, 2014 may see this trend go a step farther as the gulf widens between managers who can succeed in the new environment and those who cannot. The biggest risk many funds face is strategic: the need to grow assets under management to support margins that have been under pressure from rising operational and compliance costs and investor complaints about fees.

Apart from this operational risk, there are two market risks that could cause managers headaches in 2014. First, the stepwise withdrawal of the Federal Reserve’s quantitative easing program, or other events the markets find unsettling, could trigger a rise in equity correlations and a fall in dispersion, reversing trends that made 2013 a profitable year for long-short and other equity strategies. Whereas the Fed’s December 18 announcement to taper QE did not meet with this type of reaction, talk of a taper back in June did.

The worst-case scenario would be a return to the high-risk environment of 2010, 2011 and part of 2012, when there were huge and costly correlation spikes, says Sebastián Ceria, CEO of New York–based buyside risk analysis firm Axioma. “Things went well this year because hedge funds’ ability to control risk has been facilitated by the fact that correlations have come down significantly,” he says. Axioma, he adds, is currently concerned about what it calls the correlation roller coaster. “When [correlation] spikes, it spikes in a hurry,” he says.