Hedge Funds Continue Growth

Hedge funds are enjoying their strongest revival in more than a decade, drawing fresh capital as investors reassess their exposure to private equity and trim back richly valued stock market holdings. After a difficult spell earlier in the decade, the sector has emerged as one of the main beneficiaries of shifting sentiment across global portfolios.

Assets across the global hedge fund industry rose by an estimated $628bn in 2025, combining investment gains with new inflows, according to data from HFR. That surge lifted total assets above $5tn for the first time, a milestone reached in October and a sharp reversal from the retrenchment seen just three years earlier.

Performance has played a central role in the turnaround. Hedge funds delivered average returns of 12.8 per cent last year, based on an HFR index tracking the sector worldwide. It was their strongest annual showing since 2009, reinforcing the perception that the industry has regained its footing after years of uneven results.

The rebound follows a bruising period in 2022, when rising interest rates and volatile markets prompted investors to pull money from the sector. Hedge funds shed roughly $180bn of assets that year after disappointing performance. Since then, confidence has rebuilt steadily. Net asset growth reached about $285bn in 2023 and roughly $400bn in 2024, before accelerating sharply last year.

This renewed appeal reflects more than improved returns. Investors are also reacting to frustrations elsewhere in their portfolios, most notably in private equity. Buyout groups have struggled to return capital as dealmaking has slowed and exits have become harder to execute. Distributions have lagged commitments, leaving many institutions over-allocated to illiquid assets.

“In previous years, private markets absorbed the bulk of new allocations, but that emphasis has clearly shifted,” said Marlin Naidoo, head of capital introduction at BNP Paribas. “I have not seen this level of enthusiasm for hedge funds in a very long time.”

Liquidity has re-emerged as a decisive factor. While private equity investors wait longer than expected for cash to be returned, hedge funds offer regular redemption windows and greater flexibility. For allocators managing pension funds, endowments, and family offices, that distinction has taken on renewed importance.

Jon Caplis, founder and chief executive of hedge fund research firm PivotalPath, said waning confidence in parts of private markets was pushing capital elsewhere. The negative halo surrounding private equity, combined with early signs of strain in private credit, has sharpened investor focus on strategies that allow capital to move more freely. The value of liquidity, he said, is being reassessed across portfolios.

Concerns about equity markets have added to the shift. Strong gains in US stocks, particularly those linked to artificial intelligence, have prompted worries that valuations are becoming stretched. Some investors fear that enthusiasm around AI could be inflating a bubble, leaving portfolios exposed if sentiment turns.

As a result, allocators have begun to rebalance. Passive equity holdings tied to indices such as the S&P 500 have performed exceptionally well, pushing equity exposure towards the upper end of many investors’ target ranges. Reducing those positions has freed up capital, some of which has been redirected into hedge funds.

“Equity exposure has crept to the top of portfolio ranges because of how strong stock market performance has been,” said Kier Boley, co-head and chief investment officer of alternative investment solutions at Swiss private bank UBP. “Clients are rebalancing back towards long-term targets, and hedge funds are a natural destination for part of that capital.”

Multi-strategy hedge funds have been among the biggest beneficiaries. These firms promise steadier returns by spreading risk across asset classes, regions, and trading strategies. Large platforms such as Millennium, Citadel, Balyasny, and Point72 have absorbed substantial inflows, with the biggest managers now overseeing close to $85bn each.

Their scale and infrastructure have proved attractive to institutional investors seeking diversification without sacrificing risk controls. The appeal is reinforced by the ability of these firms to deploy capital rapidly, shift exposures, and manage drawdowns during periods of stress.

Investor surveys underline the change in priorities. Hedge funds ranked as the most sought-after asset class at the start of 2025, ahead of private credit and private equity, according to a poll of clients conducted by Goldman Sachs. That marked a notable change from recent years, when private markets dominated allocation plans.

Market volatility has also strengthened the sector’s case. Hedge funds generally navigated the sharp swings triggered by the Trump administration’s “liberation day” tariff announcements in April 2025 with limited damage. While equity markets wobbled, many hedge fund strategies delivered downside protection, reinforcing their role as portfolio stabilisers.

“Hedge funds showed early in the year that they can provide meaningful protection when markets become unsettled,” said a senior banker advising hedge fund clients. That performance helped reassure investors who had questioned whether the industry could still deliver on its defensive promises.

Even so, there are limits to what last year’s experience can prove. The volatility around the tariff announcements was sharp but short-lived, and it did not amount to a full economic downturn. Investors have yet to see how hedge funds would perform in a prolonged recession or a sustained bear market.

That uncertainty has not dimmed current momentum, but it has tempered expectations. Allocators remain selective, focusing on managers with robust risk management and a clear track record across different market conditions. Fee sensitivity has also increased, with investors pushing harder on costs after years of muted returns elsewhere.

For now, hedge funds appear well positioned. Strong performance, renewed appreciation of liquidity, and unease about both private markets and equity valuations have combined to drive the industry’s largest asset gains on record. Whether that momentum can be sustained will depend on how markets evolve, and on whether hedge fund managers can continue to justify their role in increasingly scrutinised portfolios.

What is clear is that, after years of scepticism, hedge funds have once again become central to asset allocation debates. Investors are not abandoning private equity or equities altogether, but they are recalibrating. In that adjustment, hedge funds have found fertile ground.