3 POINT PERSPECTIVE | INNOVATION EDGE
Hedge Fund Outlook: Allocations set to grow in 2025
CHAPTERS
1. Hedge funds delivered strong performance in 2024
In 2024, hedge funds (HFs) delivered differentiated performance – the second highest returns over the last 10 years.
The 2020s have so far been a broadly favourable period for HFs, with high returns and significant alpha after the low returns and limited alpha of the 2010s. HF performance this decade is especially impressive given the hugely varying market conditions that prevailed during the COVID-19 crisis and the post-pandemic period, which has been characterised by swings in inflation and rates, as well as dramatic changes in market sentiment.
In 2024, hedge funds demonstrated their ability to deliver strong results in a relatively stable interest rate environment. Overall performance was impressive: returns of 10.1%, with alpha of 2.1% (see chart) – more than in 2023, despite almost identical risk-free-rate and beta risk premium environments.
When compared to other benchmarks, hedge fund performance looks healthy. For example, the asset class outperformed the high-yield index, and fell just short of the traditional 60/40 portfolio benchmark commonly used by large investors, which returned 10.2%.
2. Hedge funds stand out when it comes to allocation plans
This year’s investor survey indicates that hedge funds are expected to receive the largest incremental allocation increase in 2025 compared to privates or long-only options. 30% more investors expect to increase allocations to hedge funds in 2025 than to decrease them and the capital may be coming from Long-Only Equity and even more so from Long-Only Fixed Income, which are both expected to see a decrease in capital deployed. The survey also shows investors are likely to make no additional increases in allocations to private equity/venture capital or private credit, which were both in favour, but flat year-over-year.
Looking at allocation plans by investor type, pensions and insurance expect to have a year-over-year allocation increase, leaping from 9% to 19% on a net basis. Endowments and foundations and sovereign wealth funds also plan to increase hedge fund allocations as they went from +21% to +25% net allocators.
Family offices, however, anticipate a slight decline (-4%) as do private banks, which plan to go from 60% to 50% making allocations on a net basis. However, the change needs to be seen in context: Private banks are expected to continue making the most allocations to hedge funds in 2025.
"Hedge fund flows were marginally positive in 2024, and we expect increased investor enthusiasm and allocation activity in 2025."
