Consultant IDs Trends That Will Define Hedge Fund Industry in 2025

Art by Andrea D’Aquino

Hedge fund industry consultant Agecroft Partners released today its list of 10 hedge fund industry trends for 2025. The firm’s 16th annual report is based on discussions with more than 2,000 institutional investors across hundreds of hedge funds.

In the past few years, the hedge fund industry has seen outflows from investors. Asset owners and institutional investors reduced their allocations to the asset class and also protested cash hurdle fees from managers when they were being outperformed by Treasurys.

Despite that backdrop, 2024 was not a bad year for hedge funds. According to Citco’s monthly hedge fund update from November 2024, hedge funds returned 2.4% in the month and 13.3% for the year’s first 11 months. These funds also saw net inflows in November and were on course for net inflows for the full year, according to Citco.

“The hedge fund industry is highly dynamic, and both managers and investors can benefit from anticipating and preparing for imminent changes,” Agecroft Partners Founder and CEO Don Steinbrugge wrote.

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The consultancy anticipates the following industry trends in the new year:

Taking Advantage of Market Volatility

According to Agecroft’s survey, fund professionals expect increased volatility in 2025. Skilled managers will be able to generate alpha by taking advantage of large price movements through security selection. Strategies that exploit significant price distortions, as well as long volatility strategies, stand to gain.

On the other hand, increased volatility can put downward pressure on equity and fixed-income valuations. In response, institutional investors might demand higher returns to compensate for the perceived rise in risk.

Blockchain and Crypto Evolution

With the incoming administration of President-elect Donald Trump expected to be friendly to cryptocurrencies, Agecroft forecasted new investment opportunities in the space. According to Agecroft, investors who can assess the market dynamics and adapt to changes are well positioned for success.

Several hedge funds are already adopting cryptocurrencies in their strategies, and with the rise of bitcoin and cryptocurrency exchange-traded funds, investing in digital assets has become easier.

U.S. Value Stocks

Agecroft predicted a reallocation into U.S. value stocks, leading to these stocks substantially outperforming. As Trump’s trade policies are expected to boost the domestic standing of U.S. companies, value-oriented stocks could be set to gain.

According to Agecroft, most hedge funds and long-only managers are heavily weighted to growth stocks. The valuation gap between growth and value stocks, as measured by their P/E ratios, is near historic highs, an imbalance that, per Agecroft, is set for a reversal.

ESG Investing Divergence

Environmental, social and governance investing is likely to diminish in the U.S. in accordance with Trump taking office, according to Agecroft. U.S. investors, already beginning to sour on ESG investing, will likely cut back further. U.S.-based investors are already the largest allocators to hedge funds, but in Europe and Asia, ESG is still meaningful to investors.

Decline in Demand for Large Multi-Strategy Hedge Funds

Investors have observed that large, multi-strategy hedge funds have been too successful at fundraising, resulting in many becoming overcapitalized. This has led to concerns about diminishing returns and capacity constraints, due to the size of these portfolios.

Investors are concerned about these managers’ ability to generate alpha and are worried that excess leverage and overlapping trades could lead to systemic risks, such as a scenario when simultaneous sell-offs could amplify market stress.

Agecroft projected an increase in demand for smaller multi-strategy hedge funds that leverage external managers to create diverse portfolios and employ market-neutral or low-net strategies within separately managed accounts.

These funds can allow more precise risk management at the aggregate portfolio level. According to the Agecroft report, investors are likely to shift toward single-manager market-neutral funds and away from larger, more complex platforms.

Rising Demand for Reinsurance Managers

Despite underwhelming performance, Agecroft predicted increased demand for reinsurance hedge fund managers in 2025, because pricing has rebounded sharply from a dip in the past decade, increasing by double or more in some cases.

Reinsurance strategies, which typically offer uncorrelated returns, could attract substantial inflows from investors seeking diversification and higher returns. Interest in reinsurance managers has increased, as many traditional asset classes have become less attractive due to rising P/E ratios and tight credit spreads.

Higher Demand for Strategies With Excess Collateral

Agecroft predicted increased demand for strategies with large collateral reserves. With the market expecting a limited number of rate cuts this year, and with short-term interest rates hovering at about 4%, higher yields will significantly improve the expected return of strategies holding significant assets in cash or short-term fixed-income positions.

Strategies poised to benefit from this trend include commodity trading advisers, reinsurance funds and market-neutral long/short equity funds.

Increasing Importance of Internal Marketing Teams

According to Agecroft, many hedge funds underestimate the critical role of internal marketing professionals. With investors increasingly demanding more tailored responses to information requests, the quality of answers can improve the likelihood of securing mandates from investors.

Arms Race for Alpha

Agecroft’s report said to expect an “information arms race” among hedge funds, with firms taking advantage of any alternative data sources. Data scientists have become more important at hedge funds, which are increasingly leveraging information from web traffic, social media sentiment and satellite imagery to inform investment decisions.

Capital Introduction Events to Surge in Demand

Agecroft also projected an increase in capital introduction events and networking events for hedge fund professionals and managers. Institutional investors enjoy these events because they allow them to screen a large pool of managers and identify those aligned with their investment criteria.

The anticipated surge in capital introduction events would align with the increased competitiveness of the industry and the potential for record asset flows to new managers in 2025. Expect investors to prefer virtual events before committing to in-person ones.