The hedge fund industry has been on a global tear. They achieved record assets under management (AUM) of $5.2 trillion in Q4, 2024, according to BarclayHedge, a provider of alternative investment data and research. They have also started 2025 on a positive note with the HFRI Fund Weighted Composite Index (an index tracking the performance of 1,500 single-manager hedge funds) producing a 1.5% rate of return in January, according to Hedge Fund Research.
Institutional investors have not been left behind in the demand for hedge funds. They constitute about 7% and 18% of the assets of public pension funds and endowment funds, according to Richard Ennis, cofounder of EnnisKnupp, an investment consulting firm.
More interestingly, surveyed institutional investors expect 81% of pension funds, 54% of sovereign wealth funds, 42% of insurers, and 34% of family offices to increase asset flows to hedge funds by 10% or more between 2024 and 2027, according to a survey by Beacon Platform Inc., a cross-asset trading and risk management platform.
There are three main reasons for this interest: hedge funds’ low correlation to other assets, the need to achieve diversification, and hedge fund performance (high risk-adjusted returns).
However, before allocating money to this asset class, asset owners must understand the top global hedge fund industry trends so they can know how best to deploy their resources.
In what follows, we will consider the top 8 hedge fund industry trends in 2025 that asset owners must be conscious of and how they can explore the opportunities provided by those trends.
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1. Institutional investors’ interest in hedge funds is likely to bounce back in 2025
In 2024, most institutional investors (47%) planned to keep their then-current allocations to hedge funds while about 35% of them wanted to decrease their allocations, according to a survey by Preqin, a provider of data and insights for the alternative assets industry.
Also, those who wanted to increase their allocations to hedge funds planned to do so in 2025, with many embracing a wait-and-see approach at the time of the report. If these institutional investors act based on their decisions in this report, then we can expect more allocations to hedge funds in 2025.
This expectation is in line with a survey by Barclays Bank.
As seen below, 30% of investors are planning to increase allocation to hedge funds in 2025, a five percentage points increase from 2024, on the back of strong 2024 hedge fund performance and a positive start to 2025.
Comparatively, more investors are planning to increase allocations to hedge funds than long-only fixed income, long-only equity, private equity/VC, and private credit.
Net investor allocation plans (2025 vs 2024)
Source: Barclays Bank
Going deeper into the data provided by Barclays provides even more relevant insights. Pensions and insurance funds are planning to increase allocations by 10% (from 9% to 19%, on a net basis) while endowments, foundations, and sovereign wealth funds are planning a 4% increase in allocations (moving from 21% to 25% net allocators).
This tallies with the survey by Beacon Platform which shows that pensions and sovereign wealth funds are the institutional investors who will increase their allocations to hedge funds the most.
What this hedge fund industry trend means for asset owners
If you are interested in hedge funds, you are not alone; many institutional investors are tracking hedge fund industry news and increasing their allocations to them.
2. Investors are showing interest in certain hedge fund strategies
Though overall demand for hedge funds is expected to increase in 2025, it seems investors are prioritising certain strategies over others.
Below is a chart by Barclays Bank showing how interest in the most common hedge fund strategies is expected to change in 2025, compared to 2024.
Net interest across hedge fund strategies for 2025
Source: Barclays Bank
Overall, Systematic (including statistical arbitrage and quant multi-strategy) and Multi-Manager /Multi-Strategy are the hedge fund strategies with the highest net interest. Merger Arbitrage and Global Long/Short are also expected to become more popular with investors.
Interest in Long/Short Equity, Market Neutral, Activist, Special Situations, Global Macro, Commodity, and Fixed-Income Relative Value (FIRV) strategies is expected to be flat while interest in credit strategies (Credit Multi-Strategy and Credit Long/Short) are expected to fall.
This expectation has started to materialise. At the sub-strategy level, Equity Hedge: Multistrategy index, Multistrategy/Pod Shop Index, and Credit Arbitrage Index posting 3.6%, 1.9%, and 1.95% returns respectively in January 2005. At the strategy level, Equity (long/short), Macro, and Event Driven strategies led the pack, gaining 2.1%, 1%, and 0.9% respectively.
What this hedge fund industry trend means for asset owners
Consider where other institutional investors are putting their money and then evaluate if those strategies they favour align with your investment goals. On the one hand, you want to know where the crowd is going and on the other hand, you want to be sure your path aligns with theirs.
3. Interest in digital assets is likely to continue
Regulatory clarity and approval of ETFs (bitcoin and ethereum) were factors that improved the acceptance of cryptocurrencies among traditional hedge funds, according a report by PwC, the global advisory firm.
The report also shows that the percentage of hedge fund managers with allocations to digital assets increased from 29% in 2023 to 47% in 2024. They also noted that hedge funds are shifting from spot trading of digital assets to derivatives trading even as many of them embrace new investment opportunities like tokenisation.
“As institutional capital flows into the crypto market, it brings with it increased legitimacy and stability,” according to OSL, a digital asset platform. “The increased interest from hedge funds is likely to have a lasting impact on the cryptocurrency ecosystem.”
Many consider the new Trump administration crypto-friendly: Trump launched a meme coin, the SEC chairman is crypto-friendly, Elon Musk (who is crypto-friendly) is leading the Department of Government Efficiency, and there have been talks of a strategic crypto reserve.
As all of these factors make crypto more accepted by traditional finance, hedge funds are expected to increase their allocations. It is not surprising then that the HFR Cryptocurrency Index (an index that tracks the performance of hedge funds focused on crypto and blockchain strategies) started 2025 on a positive note with a 0.36% rate of return in January, according to Hedge Fund Research, quoted above.
However, it should be noted that not all hedge funds share this optimism. Only 6% of respondents were planning to increase allocations to digital assets, according to a survey by Societe General, a financial services firm, reported by Reuters. “Although Trump has embraced digital assets, promising friendly regulation and to accumulate a stockpile of bitcoin, some hedge fund investors are not convinced,” commented Reuters on this survey.
It seems then that while some hedge fund managers are excited about digital assets many are still waiting to see if there will be any reality behind the crypto-friendly hype of Trump’s administration.
What this hedge fund industry trend means for asset owners
If you are a bitcoin enthusiast or doubter, it is important to choose a hedge fund with the same attitude.
4. Political uncertainty in the US will bring macro to the fore
The Trump administration has increased fiscal and monetary uncertainty in the United States and the response to this is one of the hedge fund industry trends in 2025.
Trump’s US-first policy casts doubt on US trade relationships, especially with recent executive orders regarding tariffs (and the responses that have followed). This fiscal uncertainty has also led to monetary uncertainty as the Federal Reserve has chosen to pause interest rate cuts, making the future interest rate path ambiguous.
Given that the US has trading relations with many countries and the reality of contagion – an event in one country affecting other countries – this can be a prelude to uncertainty in global markets.
In December 2024, Reuters predicted that given the uncertainties above, Macro hedge funds would come to the fore in 2025. “Next year's top pick for hedge fund strategies is so-called macro, with U.S. President-elect Donald Trump centre-stage as investors bet on how global policy decisions will impact economic conditions and play out in financial markets,” they noted.
They also pointed to a survey of 239 investment firms by Societe General which shows that Discretionary Global Macro is the topmost priority (42% of those surveyed) for investors looking to increase their hedge-fund allocations.
Source: Reuters
This growing importance of macro as a hedge fund strategy was also noted by With Intelligence, a data analytics company focusing on the asset management industry, in their 2025 Hedge Fund Outlook.
“A shift from speculative to macroeconomic events that are driving market volatility - from central bank rate cuts to US policy changes and geopolitics - will generate more opportunities for macro, relative value and event-driven funds in particular, while equity strategies may have to work harder,” they noted. “A Trump presidency, driving tax cuts, deregulation, a focus on oil and gas production, tariffs and a tougher stance on China, will likely offer opportunities for macro traders around currency fluctuations, interest rate changes, and commodity price swings, and could fuel a rise in mergers and acquisitions activity for event-driven funds, especially in energy, finance, and technology.”
It is understandable then that Macro has started 2025 on a positive note with the HFRI Macro (Total Index) and the HFRI Macro Asset Weighted Index gaining 1% and 2%, respectively, according to Hedge Fund Research.
What this hedge fund industry trend means for asset owners
If macroeconomic uncertainty is a great concern for you, consider investing in hedge funds with a macro strategy.
5. ESG uncertainty
Initially, many hedge fund managers found it difficult integrating ESG into their investment decisions since they saw it as limiting their ability to earn higher returns. It was no surprise then that private equity funds were quicker than hedge funds to embrace ESG investing.
However, in recent years, hedge funds have become more amenable to ESG investing.
Yet, there is uncertainty about the extent to which hedge funds are willing to go with ESG investing. For example, Bloomberg reported that hedge funds in Europe are pushing against new ESG reporting requirements which they claim place an enormous burden on them.
Similarly, the complexity of ESG requirements, confusion about its tangible benefits, and inconsistency of ESG ratings are also discouraging investors from fully embracing ESG strategies, according to Don Steinbrugge, CEO of Agecroft Partners, a global hedge fund consulting and marketing firm.
“The enthusiasm for launching new ESG funds has also waned,” said Julie Anderson, Program Director, Kogod School of Business MS in Sustainability Management Program. “While previous years saw a proliferation of new ESG products, recent data indicates a slowdown. Regulatory uncertainty and political rhetoric have led to a more conservative approach among fund managers. For example, the overall number of sustainable funds and exchange-traded funds (ETF) has not grown as rapidly as before, reflecting a more cautious sentiment about the near-term prospects of raising assets.”
Anderson believes that the current trend is only temporary given that fundamentals – consumer demand for sustainability, global interest in green technologies, and the pursuit of global standards – are still sound.
Nevertheless, uncertainty remains in the interim.
What this hedge fund industry trend means for asset owners
If ESG is important to you, ensure you talk to different hedge funds about their ESG policies before choosing one.
6. Hedge fund investors are seeking alignment of fees with performance
Hedge fund investors are becoming more outspoken about the need to restructure fee structures in ways that align them with performance (such that high fees should be matched with strong performance).
“Investors are increasingly vocal about the perceived disconnect between the high fees charged by hedge funds and the actual value they deliver,” according to Arootah, an investment advisory firm specialising in alternative investments. “This demand for fairer fee structures is not simply a passing trend but a clear reflection of investors’ growing insistence on accountability and value for money.”
They pointed to ExodusPoint Capital Management’s decision to link management fees to short-term Treasury yields as an example of how hedge fund firms have been responding to this challenge and recommended such an approach to other hedge funds.
“By linking performance fees to treasury yields through cash hurdles, fund managers can create a more equitable fee structure that closely aligns investor interests with fund performance. This approach demonstrates a commitment to delivering returns that exceed risk-free alternatives, thereby enhancing investor trust.”
This demand for cash hurdles is an ongoing trend that will continue to intensify, according to With Intelligence's 2025 Hedge Fund Outlook. “Investors will continue to demand better value from their hedge funds and stronger alignment in fee structures, with growing support for cash hurdles to reward those delivering real alpha over risk-free rates.”
What this hedge fund industry trend means for asset owners
When considering the alpha generated by a hedge fund, ensure you factor in the fees you will pay. Also, consider sticking to hedge funds that use cash hurdles (or similar methods) to link fees with performance.
7. Unlocking artificial intelligence and big data for alpha and personalised investing
Artificial intelligence is everywhere so it is no surprise that it is one of the hedge fund industry trends in 2025.
Hedge funds are deploying artificial intelligence to improve their strategies and achieve better returns for investors under all market conditions. For example, statistical arbitrage, one of the strategies expected to increase in usage in 2025, benefits from artificial intelligence.
They are also incorporating alternative data sources like social media sentiment, satellite imagery, and web traffic to gain actionable forecasts and insights on companies and entire industries, according to Hedge Think, a platform providing resources for hedge funds and investors.
Also, hedge funds are using AI to gain a better understanding of investors and create personalised investment solutions that will meet their needs.
As shown below, hedge funds and other capital market players are utilising AI and big data analytics for client profiling, asset allocation, trading, and risk management.
Source: International Monetary Fund
This trend is likely to continue since hedge funds thrive on information.
“Information advantages are often short-lived, and many managers will continue investing in a host of new technologies such as quantitative analytics, alternative data sources and artificial intelligence seeking to enhance their decision making and improve traditional investment processes,” said Steinbrugge. “Information and technology are used more broadly to increase efficiency and accuracy in sourcing information, researching ideas and executing investments.”
What this hedge fund industry trend means for asset owners
Focus on hedge funds that have an AI strategy and are committed to using it to improve their operations and generate alpha. More importantly, consider hedge funds that deploy AI to offer personalised investment services.
8. Increasing focus on external managers as multi-strategy funds act as allocators
The last in our list of hedge fund industry trends is the growing role of external managers.
Large multi-strategy and multi-manager hedge funds are facing capacity constraints because most of them are overcapitalised. This overcapitalisation is making it more difficult for many of them to generate alpha and investors are already expressing concerns.
One consequence of this is that these hedge funds are now acting as allocators – allocating some of their capital to external managers. “Capacity constraints among the largest will lead to continued allocations to external managers. This practice will offer more opportunity for the best performing multi-manager challengers to grow, while also providing important capital to start-ups and other niche funds,” according to With Intelligence, in their 2025 Hedge Fund Outlook
In essence, we can expect smaller multi-strategy hedge funds to grow backed by capital allocations from their overextended larger counterparts.
In their 2025 Hedge Fund Outlook, With Intelligence also expects more M&A activities among smaller multi-strategy hedge funds. “We also see potential consolidation between second-tier players and smaller multi-manager shops that have struggled to scale. These second or third-tier platforms have a good opportunity to move up the ranks organically, given that bigger firms are restricting the flow of new assets and charging a high premium for their services.”
What this hedge fund industry trend means for asset owners
investing in smaller multi-strategy hedge funds that can provide alpha (net of fees) instead of sticking with the larger ones that are overcapitalised and thus struggle to provide it.
When it comes to alternative investments, asset owners should especially be careful to weigh the pros and cons of every asset class and do their due diligence.
One way to improve the chances of making the right decisions is to talk to other asset owners and managers about investment opportunities. Such conversations can make the due diligence process more comprehensive and beneficial.
At cio investment club, we provide you with a network of investment managers and other investment professionals across the globe. You can discuss hedge fund industry news with members of this community and gain better insights into the available investment opportunities.
We also organise exclusive roundtables and investment breakfasts where you can meet investment professionals from different parts of the world. These meetings can provide opportunities for business partnerships and knowledge sharing, among others.
Do you want to be a member of an exclusive investment community that will help you make better investment choices? Register today to become a part of the cio investment club.
Takeaways
- Interest in hedge funds is growing, with institutional investors such as pension funds, sovereign wealth funds, and insurance companies planning to increase their allocations between 2024 and 2027.
- Investors are prioritizing specific hedge fund strategies, with systematic and multi-strategy funds seeing the highest demand. Additionally, macro strategies are expected to gain traction due to U.S. political and economic uncertainty.
- Hedge funds are increasing exposure to digital assets, fueled by regulatory developments and institutional adoption. Simultaneously, AI and big data analytics are enhancing investment strategies, risk management, and personalized client offerings.
- Investors are demanding better alignment between hedge fund management fees and performance, with a growing preference for cash hurdles. Meanwhile, ESG investing remains a point of uncertainty, with hedge funds facing regulatory and reporting challenges.
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