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By Hilary Schmidt, International Banker
With the return of monetary easing from leading global central banks led by the US Federal Reserve Board (the Fed); the re-election of Donald Trump as president of the United States; the continuation of seismic, market-shaking geopolitical events; and pronounced bouts of volatility observed across key markets—including global equities, bonds, commodities, currencies and cryptocurrencies—2024 ended up being a decidedly kind year for hedge funds. What’s more, the good times might not be over yet, especially given that we will likely see both a continuation and an amplification of such issues during the coming months. As such, 2025 may well turn out to be another vintage year for the hedge-fund sector.
According to hedge-fund research firm PivotalPath, hedge funds in 2024 averaged returns of 10.7 percent for the year through November versus 5.7 percent for the same period in 2023. And with the S&P 500 benchmark stock index enjoying a 23-percent gain for 2024, hedge-fund strategies involving US equities were among the best performers of the year. Indeed, Goldman Sachs reportedly told its clients in early January that hedge funds pursuing the long/short equity strategy—taking both long positions in stocks that are expected to rise in price and short positions in stocks that are expected to depreciate—delivered their highest average returns since 2020.
According to a note seen by Reuters, the total weighted average return for such hedge funds came in at 12.75 percent for 2024, with Light Street Capital’s long/short technology-focused fund among the year’s best performers, having generated a whopping 59.4 percent in returns. “It could be argued that 2024 was the year of the stock picker, with equity hedge funds playing dispersion well and really leaning into creative shorting strategies and a careful use of leverage to drive returns,” PivotalPath’s chief executive officer (CEO), Jon Caplis, told Reuters.
For the 12-month rolling period through November 2024, PivotalPath also noted that credit and multi-strategy funds continued to produce the highest alpha relative to the S&P 500, a dominant streak that began in the third quarter (Q3). CEO Jon Caplis told Reuters that there was “a resurgence of the multi-strat space across 2024” and that he expected to see additional funds being poured into this strategy.
Similarly, Hedge Fund Research’s (HFR’s) HFRI Multi-Manager/Pod Shop Index—which comprises funds of various strategy types that utilise a multi-manager (MM) or pod-shop structure, whereby fund capital is allocated to multiple independent investment teams referred to as pods—gained 2.6 percent for the month, which the fund-analytics firm attributed to managers being “positioned for the policies of the incoming administration across all sectors including energy, import, technology and financials”.
According to With Intelligence, multi-strategy, multi-manager hedge funds will grow in importance in the year ahead due to their expanding role as asset allocators. “Capacity constraints among the largest will lead to continued allocations to external managers. This practice will offer more opportunity for the best-performing multi-manager challengers to grow, while also providing important capital to start-ups and other niche funds,” the asset-management intelligence firm stated in its recently published “Hedge Fund Outlook 2025” report, whilst also disclosing its mid-2024 research showing that the largest multi-strategy hedge funds led by Millennium Management had deployed at least $20 billion in assets to more than 50 third-party managers. “The trend of backing third-party managers through managed accounts continues at pace as the largest managers in the space become more creative in deploying capital.”
The US presidential election was also pivotal in boosting hedge funds’ performances in late 2024, with November witnessing the strongest monthly returns of the year following the confirmation early in the month that Donald Trump had secured his second term. PivotalPath’s Equity Diversified: U.S. Long/Short Fundamental Index, for example, was up 3.6 percent across the month, which the firm attributed to “US beta gains courtesy of the early month ‘Trump bump’.”
According to HFR, strategy gains were led by equity edge and directional event-driven exposures, each of which posted the strongest monthly gains of the year in November. The HFRI Fund Weighted Composite Index, an equal-weighted global index of single-manager funds that report to the HFR Database, surged by 2.6 percent during the month, while the HFRI Asset Weighted Composite Index jumped by 2.1 percent. And the HFR Cryptocurrency Index also leapt by a hefty 46 percent on the “favourable outlook for cryptocurrency by the incoming Trump administration, vaulting its YTD return to 76.2 percent through November”.
The presidential election is ushering in “a new wave of US Exceptionalism”, according to Morgan Stanley, with hedge funds likely to be buoyed by associated themes such as the ongoing artificial intelligence (AI) frenzy, monetary-policy easing and the Trump administration’s pro-business, deregulation agenda, which should prove highly supportive to US equities. “We continue to believe that hedge funds will play a critical role in investor portfolios in 2025, seeking to capitalize on what we expect to be a year of alpha winners and losers determined by policy proposals and enactments, while also offering a robust source of diversification should cracks in the markets’ relatively calm façade begin to show,” the US bank noted in its “2025 Hedge Fund Outlook”.
Global macro hedge funds—that is, those that focus on broader market changes as a result of macroeconomic and geopolitical events—also experienced something of a renaissance in 2024, as elevated interest rates presented more opportunities for managers compared with the ultra-low-rate environment that had prevailed during the previous decade and the early-2020s COVID era. According to a Bloomberg report published in early January, $2.5-billion Discovery Capital Management, which focuses on macro bets in emerging markets, gained 52 percent in 2024, while macro hedge fund PointState Capital delivered 47.9 percent in returns.
And with Trump back in office, along with a stronger US dollar and US stock market compared to the November 5 election night, macro funds could well be among the leading performers in 2025. “For the first three to six months of 2025, it is going to be all about ‘America First’ asset performance,” Marko Papic, chief geopolitical strategist at BCA Research, which deals with many macro hedge funds, wrote in his outlook for 2025.
Indeed, at 42 percent, discretionary global macro ranked first for strategy amongst the 239 investment firms surveyed by Société Générale in November regarding institutional investors’ planned hedge-fund allocations within the next 12 months. Funds trading commodities and equities ranked second and third in the list, at 39 percent and 37 percent, respectively.
“Macro seems interesting now given a more turbulent political backdrop and what it means for both fiscal and monetary policy,” Craig Bergstrom, chief investment officer at Corbin Capital Partners, told Reuters in mid-December.
Perhaps more surprisingly, however, is that cryptocurrencies/digital assets ranked at the bottom of the list, with just 6 percent of managers planning to allocate to this asset class. Although Trump is widely viewed as a pro-crypto president, and speculation abounds over whether he will establish a bitcoin strategic reserve, hedge funds remain apprehensive about committing capital to this sector. “We haven’t seen a lot of institutional investor demand on the solutions side for crypto trading strategies,” Carol Ward, head of solutions at the $175-billion Man Group, acknowledged to Reuters.
Benjamin Low, a senior investment director at Cambridge Associates—an advisory firm that links hedge funds with investors and undertakes fund-manager selection and allocation for clients—confirmed that Asia-based funds are exploring some small-scale crypto investing. Crypto may also be pursued for diversification purposes, Low also noted. “But the volatility is so high, when you talk crypto, what are you trading? Is it just the cryptocurrencies? Are you buying into companies or equities?” he added. “The definition is so broad and wide that it might invite more questions from existing investors.”
Finally, event-driven strategies—those that seek to profit from specific corporate events—are likely to perform strongly in 2025, with Trump’s pro-business posture, declining interest rates, lower corporate taxes and an expected jump in capital deployment from the private-equity space all likely to boost dealmaking activity this year. “We continue to prefer managers who can take advantage of selective ‘fat pitches’ in Distressed, while possessing the skill set to use other investment strategies such as capital structure arbitrage and event-driven trading,” according to the “H1 2025 hedge fund outlook” from UK asset-management firm abrdn Investments, published on December 20. “For Merger Arbitrage, expect deal activity to be driven by strategic corporate deals and private equity’s need to deploy capital. Given recent antitrust interventions, spreads are more attractively priced.”
