Brighter times beckon for emerging hedge funds

The first half of 2025 proved far more turbulent than expected, with Trump’s aggressive trade tariffs and other policies unsettling markets globally. As we entered the year, interest in emerging funds was strong: our own unique research, published in the State of the Hedge Fund Industry 2025 report, found that 42% of hedge fund clients were considering moving to a smaller manager. In addition, two-thirds of investors surveyed by AIMA were open to allocating to emerging managers with less than $100 million in assets under management (AUM).¹ This reflected the view that many of the large multi-strategy platforms had become overcapitalised and smaller, nimbler and more opportunistic funds were well placed to outperform.

Testing times

There is little doubt that, due to the unexpected volatility seen in 2025, hedge fund clients have become more cautious, preferring to stick to tried-and-tested strategies and the biggest, most stable managers. The fundraising environment has also become much more challenging than expected.

These factors explain why new hedge fund launches took place at the slowest pace in more than a decade during the first quarter. Moreover, emerging managers are facing the brunt of the slowdown, with startup managers accounting for just over 40% of all launches this year and only five so far in the second quarter, according to the hedge fund technology business STP.²

Clouds lifting

However, there are reasons for cautious optimism regarding the second half of 2025 and beyond. Investor sentiment surged in July to its most bullish since February, according to a Bank of America (BofA) global fund manager survey. The revival was driven by the biggest jump in profit optimism in five years and a record surge in risk appetite.

Reuters reported that investor sentiment had surged on the assumption that US President Donald Trump would not carry through his threat to impose hefty tariffs on major trading partners by his new deadline of August 1.³ In the event, the tariffs unveiled on August 1 amounted to an average 15%, prompting a subdued response from investors with stocks falling only slightly.⁴ Moreover, investors continue to rely on emerging managers for diversification and outperformance, according to Preqin. The financial data provider says that between March 2020 and February 2025, emerging fund managers delivered a five-year annualised return of 16.23%, compared with an 8.53% return from their larger, more established peers. ⁵

All of this suggests that the fundraising environment for emerging managers could improve going forward. However, the sector still faces many challenges. These include rising costs.

Around 43% of hedge fund respondents to the survey conducted for IG Prime’s State of the Hedge Fund Industry 2025 report cited investment compliance and other regulatory requirements as a key pressure, while 42% named technology. But costs appear to be rising across the board, with salaries and wages, back-office and administrative costs, and marketing and service-supplier costs cited by significant proportions of respondents. Moreover, around 45% of respondents expected costs to rise by more than 6% over the next year, while 42% anticipated a still inflation-busting increase of 3% to 6%.

Better news on costs

There may, however, be some positive news in terms of regulatory costs. In April 2025, for example, the UK proposed reforms that would impose a lighter regulatory burden on fund managers below the £5 billion threshold. The government argues that the shift will unlock capital, reduce regulatory friction, and promote innovation across the alternatives sector, according to Hedgeweek.⁶

Earlier, in March, Dubai said that it was reviewing its regulations with the aim of removing unnecessary regulatory burden and lowering barriers to entry.⁷ The Dubai Financial Services Authority proposed cutting minimum capital thresholds for some money managers and said it would consider reducing the amount of emergency cash firms must have on hand, as well as scrapping the rules requiring the regulator to vet and approve key hires. The changes are likely to be implemented in 2026.