The hedge fund industry is expected to rebound in 2025,
supported by lower interest rates, improved investor sentiment, and the use of
artificial intelligence (AI) in investment processes. According to a recent
report by IG Prime, these factors are driving renewed interest in the sector,
which is showing signs of recovery after several years of challenges. New fund
launches are on the rise, and assets under management have reached record
highs.
Global Overview and Outlook
In 2024, the hedge fund industry faced rising costs,
regulatory pressures, and uneven returns. The Federal Reserve’s 50 basis point
rate cut that year marked a shift. Lower interest rates make it easier for
hedge funds to outperform safer investments. Increased market volatility,
driven by geopolitical tensions and economic uncertainty, also created more
chances for profits.
The election of Donald Trump as U.S. president in November
2024 added to positive sentiment. His administration is expected to adopt
policies favorable to hedge funds. The appointment of Scott Bessent, a hedge
fund veteran, as Treasury Secretary is seen as a signal of regulatory easing.
This could influence other regions competing to attract investment.
AI Integration
AI is increasingly used by hedge funds, with 86% of managers
employing generative AI tools. AI supports data processing, predictive
analytics, algorithmic trading, and fraud detection. A survey found 64% of
managers see AI as most impactful on forecasting, while 52% highlight data
analysis benefits.
However, AI’s ability to consistently generate excess
returns is uncertain. The Eurekahedge AI Hedge Fund Index has underperformed
the S&P 500 recently. Questions remain about whether AI’s costs justify its
returns. Regulators are also concerned that AI could increase risks of market
manipulation and herd behavior. Despite this, AI is valued for improving
operations, risk management, and client services.
Performance and Strategies
Hedge fund results in 2024 were mixed. Macro funds
struggled, but multi-strategy and systematic funds performed well. Long equity
strategies benefited from gains in global stocks, especially in U.S. technology
shares. Event-driven strategies also gained due to increased merger and
acquisition activity.
Looking ahead, multi-strategy funds remain favored, followed
by emerging market and equity long/short funds. Credit strategies, especially
private credit, continue to attract interest for their resilience in volatile
markets.
Fee Trends and Investor Expectations
Investor demand is shifting toward lower fees and closer
alignment with fund performance. The traditional “2-and-20” fee model is
declining, with current averages around 1.35% management fees and 16%
performance fees. More funds are introducing “cash hurdles,” charging
performance fees only if returns exceed the risk-free rate. This reflects
investor dissatisfaction with high fees amid average returns.
Private Markets and Digital Assets
Private markets remain attractive, with private equity and
credit driving growth. The private credit market exceeded $3 trillion in assets
under management in 2024. Stricter banking rules and the search for higher
yields contribute to this trend. Digital assets are also growing, with 47% of
hedge funds having cryptocurrency exposure. The approval of Bitcoin and
Ethereum ETFs and clearer regulations helped increase confidence.
Outlook for 2025
The industry is positioned for growth in 2025, aided by
lower interest rates, technological progress, and a more supportive regulatory
environment. Multi-strategy and credit funds are expected to perform strongly.
AI and private markets will continue as growth areas. Smaller funds may face
challenges competing with larger firms, potentially leading to consolidation.
This article was written by Tareq Sikder at www.financemagnates.com.
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