But many investors are disappointed with the asset class's returns
Hedge funds have returned to favour in the last year with assets under management surging as investor sentiment improved.
And it seems that 2025 will build on the upward trajectory with the latest research from Bank of America indicating that half of the global investors surveyed plan to increase allocations to hedge funds this year.
The Wall Street bank’s prime brokerage department’s poll showed a 2% rise in hedge fund allocation intentions compared to the start of 2024, with responses from 256 firms managing a combined US$1 trillion in assets.
Performance in 2024 was solid with an average return of around 10% and while this was less than half of the S&P 500’s 23% return it was an indication that hedge funds continue to offer a viable option for diversification and risk mitigation.
More respondents reported achieving discounts in 2024 (60% vs. around half in 2023) and better liquidity terms (22% vs. 17%).
However, BofA’s survey found that 37% of respondents plan no change in hedge fund allocations while 7% plan to cut their allocations in 2025 (down from 12% in 2023) with 73% citing underperformance.
Investors were also shown to be dissatisfied by hedge funds that changed their investment strategies, or those that simplified or consolidated their portfolios. Other concerns include hedge funds being too exposed to crowded trades, which could mean losses where there is a sudden mass exodus.
The survey reveals that stock and bond trades are the most favoured by investors compared to those that follow trends or the systematic funds that invest based on macroeconomic events.
