Hedge fund investors are increasingly shifting away from traditional strategies that rely on broader market movements for returns towards alternative trades amid expectations of volatile markets in 2025, according to a report by Reuters citing a new Barclays survey released on Tuesday.
The survey, which polled 325 hedge fund investors managing nearly $9tn, found a growing preference for strategies that minimise exposure to market “beta” — the extent to which hedge fund returns mirror broader market trends. Investors now want hedge funds to reduce beta-driven strategies to between 15% and 5%, with some advocating for zero market dependency.
The push for alternatives follows significant losses within the hedge fund sector during the recent tech stock sell-off on 29 January, triggered by the emergence of DeepSeek, a low-cost artificial intelligence model from China. Despite declining hedge fund concentration in tech stocks since its 2023 peak, exposure to such trades remained elevated compared to pre-pandemic levels.
Hedge funds’ average beta currently sits at just over 20%, said Roark Stahler, Barclays’ head of strategic consulting for the Americas.
Uncertainty surrounding policies under the new US administration has led investors to favour hedge fund strategies that capitalise on market volatility, according to Jon Caplis, CEO of research firm PivotalPath.
“Equity valuations have climbed substantially — and perhaps unsustainably — since 2020, with the S&P 500 annualising 14.5% growth over that period,” Caplis noted.
Hedge fund approaches such as long-short stock picking, credit, and activist strategies have fallen out of favour with investors. Instead, there is a growing appetite for funds that deploy algorithms to trade differences in relative values of stocks and assets affected by mergers and acquisitions, Barclays’ report said.
Multi-manager hedge funds, which operate multiple trading strategies under one structure, emerged as the most sought-after choice among investors. These funds captured 56% of investor allocations in 2024, up from less than half the prior year.
The data also highlighted the growing dominance of the largest hedge funds. Over the past decade, the average top 20 hedge fund has expanded by nearly 50%, with assets under management climbing from $34bn in 2014 to approximately $50bn today.
In contrast, smaller and mid-sized hedge funds saw more modest growth, increasing by just $1bn in assets over the same period.
