More than 70% of hedge funds are now allocating to private markets, as investor pressure for stronger returns pushes managers to diversify beyond traditional strategies, according to new data from IG Prime’s prime brokerage business.
In a press statement, IG Prime highlights a growing shift as hedge funds increasingly embrace private equity, credit, real estate, and infrastructure – territory once dominated by private equity firms. Specifically, 61% of hedge funds now invest in private equity, while 45% are active in private real estate, 39% in private credit, and 38% in infrastructure.
“The growth of hedge funds has meant there’s been a crowding of trades that historically worked well. Some of the edge has been arbitraged away,” said Chris Beauchamp, Chief Market Analyst at IG Prime. “Funds are now looking to private markets as a new frontier for alpha.”
This pivot brings hedge funds into direct competition with private equity firms, many of which are also diversifying into new private asset classes, including credit, infrastructure, and real estate. Hedge funds, known for their opportunistic nature, are increasingly positioning themselves as rivals and complements to traditional PE players in sourcing and structuring off-market deals.
Private equity remains the fastest-growing private asset class for hedge funds, with 58% reporting increased exposure in the past year. Real estate (48%), natural resources (34%), private credit (31%), and infrastructure (30%) also saw notable allocation growth.
While private equity faced headwinds in 2024, due to elevated interest rates and delayed IPO exits, hedge funds report continued momentum in private credit. With banks scaling back lending in the face of regulatory pressure, private credit has filled the gap, offering direct lending and structured solutions to a wide range of borrowers.
Some 31% of hedge funds named private credit as their fastest-growing allocation within private markets over the past year. “Private credit has become an essential piece of the portfolio, particularly as institutional investors seek yield in a higher-rate environment,” said Beauchamp.
Broader market structural trends – including companies delaying IPOs and an uptick in delistings – are further fuelling the shift to private assets. These conditions are likely to support continued hedge fund expansion into private markets, despite rising competition from established PE platforms.
“The question for hedge funds is what skills they bring to bear in these private market that might give them the edge over existing participants such as PE funds,” said Beauchamp. “Some will be competing directly with PE and private credit funds for the same investments. Others will be hoping that they can use the current tariff related disruption to pick up assets priced for distress.”
