Larger Hedge Funds Dominate in Volatile 2025 Market
Hedge funds are back in investors’ playbook, but not all hedge funds are feeling the love.
According to Hedge Fund Research (HFR), the hedge fund industry saw a net inflow of $12.6 billion for the first quarter of 2025, following 2024’s net inflows of $10.5 billion. The revived interest was brought by political uncertainties, global divergence with U.S. exceptionalism fading, and heightened market volatility. With the inflow, total global hedge fund capital rose to a record level in the first quarter of 2025, ending the quarter with an estimated assets under management (AUM) of $4.53 trillion. This was the sixth consecutive quarterly record, highlighting renewed interest among investors who are looking to rebalance their portfolios beyond 60/40.
Investors’ interest, however, seems to be concentrated on a few larger players. For instance, firms managing over $5 billion took $7 billion of the $12.6 billion in inflows, which explains the rise in the average fund size, while the overall number of funds has declined. This also indicates the continued trend of consolidation and a 'bigger is better' mentality. It’s understandable why investors lean towards larger funds. They have institutional framework with proprietary risk management and operational systems. They tend to boast long and strong track records as well, providing a clearer history of performance through various market cycles. Another outperforming year in 2024 by the biggest funds seemed to boost investors’ preference on them as well. They are also where investors find portfolio managers with established reputations. That said, although not yet observed, it is important to monitor the potential return dilution as it becomes harder to deploy capital into high performing, capacity-constrained strategies as well as crowding of trades. Crowding of trades happens when large funds chase the same set of opportunities, which can shrink return-generating potential and increase unwinding risk.
Hedge Fund 2024 Performance by Size
Source: Alternative Fund Insight, LPL Research 06/10/25
From a strategy perspective, multi-strategy funds were the most popular, continuing their popularity as an operationally efficient, market cycle-resilient solution. Discretionary macro and diversified equity hedge, including equity market neutral, also saw increased demand. This trend shows investors’ increased appetite for those alpha generating, diversifying strategies in times of uncertainty. Investors have also shown increased interest in strategies that adopt artificial intelligence and machine learning into their investment process.
LPL View
If uncertainties persist, volatility remains elevated, and the economy and the markets continue to diverge from one another, demand for hedge funds will likely stay solid, especially those bigger funds with low correlations to risky assets. And it is understandable the “bigger the better” mentality would continue given the recent outperformance of the biggest funds.
While LPL Research’s Strategic and Tactical Asset Allocation Committee (STAAC) does not have bias towards size of the funds, the STAAC remains constructive on alpha generating, diversifying liquid alternative/hedge fund strategies, especially equity market neutral, discretionary global macro, diversified managed futures, and multi-strategy.
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