Setbacks in 2025 likely to prove temporary for hedge funds

The hedge fund industry entered 2025 in optimistic mood, hopeful the Trump administration would pursue pro-growth and pro-market policies, including the deregulation of financial markets. There was also hope that the global economic environment would improve amid an outlook of lower interest rates, which should support equities, bonds and real estate, among other sectors. Some of the world’s largest hedge funds finished 2024 with comfortable double-digit returns, adding to the buoyant mood.

IG Prime survey highlights optimism

Our exclusive survey for our 2025 State of the Hedge Fund Industry report certainly found hedge funds confident about prospective returns in 2025. Around 30% of respondents expected to see positive returns of over 10%, while another 52% anticipated returns of 5% to 10%. By contrast, only 16% expected to see returns of over 10% in 2024. Risk appetite was also improving among investors, according to our survey of hedge fund clients featured in the same annual report. The survey found that 58% of respondents were less risk-averse in 2024 than in the preceding year.

Many analysts shared the positive view. The International Banker, for example, forecast that 2025 could prove a ‘vintage’ year for hedge funds. The publication cited the continuation of trends that supported hedge fund performance in 2024, namely ‘seismic, market-shaking geopolitical events; and pronounced bouts of volatility observed across key markets—including global equities, bonds, commodities, currencies and cryptocurrencies’. Hedge funds certainly delivered a strong improvement in returns last year, averaging a 10.7% return for the year through November, according to PivotalPath, versus 5.7% for the same period in 2023.¹

Meanwhile, Morgan Stanley believed the US presidential election had ‘ushered in an era of US Exceptionalism’, which it expected to remain a theme in 2025. The bank said that hedge funds should benefit from associated themes such as the continuing artificial intelligence (AI) ‘fervor’, as well as monetary policy easing. It concluded 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’.²

Fast-moving picture

Fast-forward to mid-2025 and the picture looks very different. The era of US exceptionalism appears to be over, with the dollar and Treasuries under pressure as investors lose faith in US assets. The principal reason is that the Trump administration has pursued radical policies to try and transform the US economy, often in an erratic manner that has left investors struggling to determine the outlook for the global economy and assets. Global stocks, for example, fell by over 11% in the days following the so-called ‘Liberation Day’, when President Trump revealed steep tariffs on imports from across the world.³ Financial markets subsequently recovered after Trump paused those tariffs.

It is true that the high levels of volatility seen in financial markets this year have benefited some hedge funds, but others have experienced significant losses. This rising dispersion of returns means that manager selection matters more than ever. Reuters reported in June that fund returns so far this year show a stark divide between those funds that have been able to navigate Trump’s ‘erratic’ decision-making and switch tactics quickly, and those hemmed in by algorithmic strategies.

The news agency, citing a Société Générale client note, said that systematic hedge funds, whose algorithms ride market trends, were down more than 11% over the year to the end of May. However, it added that hedge funds that use their discretion on the timing of trades and the asset classes they choose were up almost 7% by the end of May, according to data from the hedge fund research firm PivotalPath.⁴

Fund selection vital

Bloomberg also highlighted the wide dispersion of hedge fund returns in Asia in 2025. In May, the agency reported that some Asia-based hedge funds had booked exceptional gains in April as Donald Trump’s tariff hikes unsettled markets. The news agency cited the example of the volatility-focused True Partner Fund, which rose 5.3% in its strongest month in more than five years, according to a newsletter sent to investors. MY.Alpha Management’s ‘roughly’ $700 million Japan hedge fund returned 6.5%, said ‘people with knowledge of the matter’, according to Bloomberg.

However, the agency also pointed out that some hedge funds had lost considerable amounts of money. It explained that Arete Macro Fund had lost 9.2% in April, marking the worst month since it began trading in 2012, while Ariose China Growth Fund slumped by 10%.

There are also continuing positives for hedge funds. Trump is likely to press ahead with financial-market deregulation that should herald a competitive race to deregulate worldwide. As Politico points out: when Washington weakens its financial guardrails, others feel pressured to follow suit to stay ‘competitive’.⁵

Trump’s policymaking may also become more conservative as we head into 2026. His flip-flops on tariffs and other issues have already had an impact on the economy. In June, for example, the World Bank said it expected US economic growth to halve to 1.4% in 2025 due to Trump’s tariff policies. Yet Trump knows that voters go to the polls again in mid-term elections due to take place in November 2026. Unless the economy and consumer confidence recover, Trump’s Republicans could easily lose control of Congress, leaving him as a lame-duck president.

In the longer term, the great wealth transfer is likely to lead to a surge in demand for hedge fund services from family offices and wealth managers. Around $100 trillion in assets will be transferred to younger generations in the US alone, according to Cerulli Associates, a wealth manager.⁶ Much of it will be handed over to hedge funds to manage.

Challenges remain

As ever, there are some headwinds and potential threats. The geopolitical environment is highly uncertain, and while that could create the financial-market volatility that hedge funds thrive upon, the consequences may prove challenging even for hedge funds to manage. Moreover, in the face of rising geopolitical tensions, many investors may simply adopt an ultra-cautious approach to investing.
Pressure from investors to more closely align fees with hedge fund performance, together with increasing competition, could also affect income in 2025. At the same time, costs, which have taken a toll on profitability in recent years, will continue rising as pressure to invest in new technology such as AI, and in staff, continues to mount. Hedge funds certainly believed that 2025 would provide little relief in terms of cost pressure. Around 45% of respondents to our survey expected costs to rise by more than 6% over the next year, while 42% anticipated a still inflation-busting increase of 3% to 6 %.

Overall, however, it does appear that while the hedge fund industry faces considerable short-term challenges in 2025, the outlook should improve going into 2026, supported by divergent global economic policies and the new US administration’s deregulatory agenda. Indeed, we believe the foundations for the sustained growth of the hedge fund industry could be laid this year.

Sources

¹ https://internationalbanker.com/brokerage/a-favourable-outlook-looms-for-hedge-funds-in-2025/
² https://www.morganstanley.com/im/en-us/individual-investor/insights/articles/hedge-fund-outlook-2025-election-impacts.html
³ https://fundselectorasia.com/5-funds-that-have-bounced-back-post-tariff-sell-off/#:~:text=Global%20stocks%20fell%20over%2011,certain%20gold%20and%20property%20funds.
⁴ https://www.reuters.com/business/finance/trend-hedge-funds-struggle-more-nimble-macro-funds-embrace-whipsawing-markets-2025-06-13/
⁵ https://www.politico.eu/article/donald-trump-stability-global-finances-silicon-valley-bank/
⁶ https://www.ft.com/content/0512915b-92f5-4edb-bfa7-c5e61756260a