New hedge fund formation rebounded strongly in 2025, reaching its highest level in four years, as investors and managers positioned portfolios for a more volatile macro and geopolitical backdrop, according to a latest Market Microstructure Report from HFR.
HFR’s research shows that an estimated 562 funds launched 2025, marking the strongest annual total since 2021. The increase in activity comes alongside persistently low levels of fund closures, underscoring improving industry confidence and sustained investor demand.
Liquidations fell to approximately 287 over the same period, significantly below the 406 closures recorded in 2024 and representing the lowest annual total in more than two decades. At the same time, total industry assets climbed to a new high of around $5.16tn at the start of 2026.
Launch activity in the final quarter of 2025 highlighted a shift in manager focus. Roughly 135 new funds came to market in Q4, with equity hedge strategies accounting for the largest share, followed by macro funds. This marked a change from earlier in the year, when relative value approaches had dominated new launches.
Closures remained modest in the quarter, with an estimated 72 funds winding down. Equity hedge and relative value strategies accounted for the majority of these liquidations.
The report also pointed to a growing divergence in manager performance. The top decile of funds delivered gains of more than 47 percent in 2025, while the bottom decile posted double-digit losses, resulting in a significantly wider dispersion than the previous year.
This widening gap is likely to reinforce allocator focus on manager selection, particularly as volatility across asset classes increases.
Fee pressure persists, with incentives ticking higher
Fee trends remained mixed. Average management fees edged lower in the fourth quarter, while incentive fees saw a modest increase. Newly launched funds in 2025 continued to price more competitively on management fees but offered higher performance-linked incentives, reflecting alignment with investor return expectations.
The prime brokerage market remained concentrated among leading global banks, with Goldman Sachs, UBS, JPMorgan Chase and Morgan Stanley retaining dominant positions heading into 2026.
On the administration side, providers including SS&C GlobeOp, Citco Fund Services and State Street continued to lead the market.
In a separate development, HFR introduced a new co-investment benchmark designed to capture returns from managers offering concentrated “best ideas” and co-investment opportunities.
The index, which is investable, has delivered strong historical performance, reflecting growing investor appetite for more targeted exposure alongside traditional fund allocations.
Commenting on the findings, Kenneth J Heinz, President of HFR, said the rise in launches reflects increasing demand from both institutional and retail investors seeking liquid, diversified strategies capable of navigating uncertain conditions.
He noted that heightened volatility across asset classes—driven by geopolitical tensions, including the ongoing Iran conflict, as well as shifts in macroeconomic expectations—has reinforced the appeal of hedge funds as both defensive and opportunistic allocations.
