Hedge Fund Outlook H1 2025

Hedge funds will offer interesting opportunities in the first half of the year, providing appealing diversification benefits for global portfolios.

Hedge Funds (HF) were up +9.7% in 2024, supported by L/S Equity, EM-focused and deep Event-Driven strategies. CTAs were the main underperformers. HF outperformed diversified global allocations, including 40/60 equity/bond portfolios, up +6.2%. Furthermore, HF volatility was lower, with lower net exposures. Overall, the HF industry continued to produce very strong alpha in 2024, up an estimated 6.2% y/y. Positive HF performance and the search for diversification are spurring renewed interest and flows in the asset class. Preqin estimates1 that HF’s AuM progressed in 2024, reaching $4.9tn as of Q3

We remain in an atypical cycle: extreme inflation and rising rates resulted in a significant economic slowdown from late-2021 to mid-2023, but did not lead to a recession. Since then, economies have been recovering, reverting to cruise level, supported by central bank rate cuts amid continued disinflation and still elevated fiscal spending. 

• Theme #1: Growing economic dispersion
• Theme #2: Macro uncertainty is relayed by policy uncertainty (trade, fiscal, regulations, geopolitics)
• Theme #3: More frequent economic cycle inflexions ahead
• Theme #4: A benign cycle would mitigate markets’ downside risks
• Theme #5: EM Fixed Income (EM FI) less intertwined with politics than Global Macro (GM)
• Theme #6: Trendiness to switch from equity to macro assets
• Theme #7: Bottom-up fundamentals take center stage, amid rich equity and credit valuations
• Theme #8: Bifurcating drivers still make room for stock-picking, unlike credit that mainly relies on carry
• Theme #9: Animal spirits back in the US; the rest of the world remains herbivore
• Theme #10: Cash rate still high
• Theme #11: A brave new world for diversification

Overall, we seek a more balanced allocation across HF strategies than in 2024. Skewed towards L/S Equity Neutral, EM FI and L/S Credit in 2024, we favour a more diversified allocation within L/S Equity, between neutral and diversified styles, and a more balanced position across regions. We would also favour a more balanced allocation between bottom-up and top-down styles, with a tilt to both L/S Equity and EM FI strategies. We prepare to reweight Merger Arbitrage and Global Macro in H2 25. Fund selection would matter more for Macro FI, favoring the most tactical and/or arbitrage-oriented strategies. We would keep a neutral allocation to CTAs.