This is the second installment of the HFLR’s two-part coverage of Citi Investor Services’ (Citi) fifth annual hedge fund industry Evolution Report, entitled “Opportunities and Challenges for Hedge Funds in the Coming Era of Optimization” (Report).  The Report, which predicts substantial growth in hedge fund assets under management in the coming years, provides insights into how hedge fund managers can position themselves to benefit from this continuing growth.  Citi discusses three “diversification trends” in the hedge fund space: A change in the way that investors use hedge funds in their portfolios, the “emergence of a multi-tiered investor audience” and the move to create alternative products for retail investors.  The first part of this series covered the portions of the Report that deal with the evolution of the hedge fund investor base since the 2008 global financial crisis, the evolving role of hedge funds as “shock absorbers” in institutional investor portfolios and the shift of those investors toward risk-aligned portfolios.  This article covers the second two trends, as well as co-investment opportunities, the leveraging by investors of hedge fund managers’ skill sets, and Citi’s outlook for hedge fund industry growth.