There will be losers from the rush into hedge funds. BlackRock explains how not to be one of them.

• Hedge funds are in high demand, BlackRock says in its latest report on the industry.
• Still, the world's largest asset manager warns that outcomes across the industry will be varied.
• Hedge funds' value "is not inherent," the new report states.

The hedge fund industry is expected to grow by hundreds of billions of dollars over the coming years — exceeding $6 trillion by 2030 — but not every investment will be a winner.

Hedge funds will experience a "wider range of possibilities" than in the past, BlackRock states in a new report, due to choppy markets and the uncertain geopolitical environment. While those conditions give the roughly $5 trillion hedge fund industry more opportunities to outperform, the added volatility can wrongfoot even the smartest investors.

The institutions and family offices that invest in hedge funds need to know that the industry's value "is not inherent," the report states.

"Today's market environment is not only expanding the opportunity set for hedge funds, but it's also increasing the premium on manager skill," writes Michael Pyle, the $13.9 trillion asset manager's deputy head of the portfolio management group, in the report.

In other words, the gap between the industry's winners and losers will be significant, so the "selectivity, adaptability, and discipline" of hedge-fund backers will matter more than ever.

Hedge funds as a whole are not a monolith. Instead, they comprise a range of strategies, from sprawling multistrategy funds with dozens of teams trading different asset classes around the world to concentrated equity managers that focus on a small collection of companies to sophisticated systematic strategies run by algorithms and computer scientists.

Hedge funds' advantage in the increasingly volatile market conditions slamming equity and bond markets lies in their nimbleness and ability to use more complex instruments, such as derivatives, to express their market views, BlackRock writes. But these same instruments and against-the-grain views can backfire.

"Disciplined manager selection, thoughtful portfolio construction, and rigorous risk management" are essential to build a resilient roster of hedge funds, the report reads, and "that includes stress-testing exposures, trimming allocations where risk has risen alongside strong performance, and maintaining the flexibility to deploy capital to the most interesting opportunities."

The ability to move capital in and out of different strategies has diminished in recent years as sought-after managers, such as Izzy Englander's Millennium, have increased lock-up periods, and many of the top funds have been closed to new capital for years. The risks posed by the growth of multistrategy managers, in particular, should be top of mind, BlackRock states, as they've increased industrywide talent costs and warped markets through the leverage they employ.

Of course, the most essential part of any recipe is the quality of the ingredients, and a stew of hedge funds is no different.

"Access to and selection of the best hedge funds remains critical," the report states.