The global hedge fund industry grew by $628bn (£471bn) in 2025, passing $5trn in October, according to data provider HFR, and returned 12.8%, its best performance since 2009.
More investors are turning to hedge funds in the search for diversification, with the asset class making its largest gains on record in 2025.
The global hedge fund industry grew by $628bn (£471bn) in 2025, passing $5trn in October, according to data provider HFR, and returned 12.8%, its best performance since 2009.
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After a drop in assets of $180bn in 2022 due to poor performance, the rebound has been partly put down to a refocus away from private equity from investors.
However, experts said the "new economic era" investors find themselves in will see hedge funds becoming a more important tool in portfolio construction.
As Ed Cole, head of multi-strategy equities within solutions at Man Group, highlighted, portfolio construction was fairly simple for a generation of investors, with the 60/40 portfolio "close to a law of nature" for four decades of falling inflation and rates.
"Now we are moving into a new economic era, the relationship between stocks and bonds has reverted to its long-term trend: positive," he said.
"Hedge funds, properly selected, offer something the modern portfolio desperately needs - diversification that is both structural and dynamic. Structural, in that strategies such as equity market neutral, trend following and macro have return distributions that are genuinely uncorrelated with equity and bond markets over the cycle. Dynamic, in that, unlike private markets, they allow investors to act."
Mark Dowding, fixed income CIO at RBC BlueBay, said today's environment of "greater dispersion from idiosyncratic events, thematic disruption and geopolitical gyrations" is where multi-strategy hedge funds can "thrive".
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"Firstly, hyper-diversification is key to [their] survival," he explained. "Secondly, having a view of and insights on thousands of securities at any one time is essential. This can be anything from a view on a corporate or sovereign bond, FX pair or rates curve. It is also important to have optionality in terms of how these are implemented, whether that be via short trades, cash bonds or derivatives, for example."
Majid Khan, director, alternative investments, at Russell Investments, said hedge funds remain one of the few areas in capital markets where genuine alpha can still be achieved.
This assertion was echoed in a paper by BlackRock, released in August 2025, which called for multi-asset managers to increase allocations.
"Assuming more alpha is available today, our analysis suggests hedge fund allocations could increase by up to 5 percentage points when targeting similar risk levels found in traditional portfolios," it said.
"For low-volatility hedge fund strategies, one way to fund the larger allocation would be by reducing holdings in developed market government bonds. For high-volatility hedge fund strategies, the increase could be funded from public equities, rather than at the expense of private markets."
That said, hedge funds must be handled with care.
AJ Bell only uses the strategies for a minority of clients, who see the benefits of diversification and potential downside protection. The majority are wary due to a lack of familiarity, said the group's head of investment partnerships, Ian Aylward.
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Cost and simplicity are other major considerations, with Aylward stating any hedge funds they do use are always in a daily priced and traded fund format.
AJ Bell only uses two strategies – equity market neutral and managed futures – which Aylward sees as among the most straightforward and cheapest in the fund universe.
"Our modelling indicates equity market neutral funds may be expected to return cash plus 2% p.a. with a volatility of around 5%, whereas managed futures funds are considerably more volatile, perhaps returning cash plus 4% p.a. in future, with a volatility of around 13%," he said.
Indeed, strategy matters. Each have their own strengths and weaknesses in different environments, meaning performance can diverge significantly.
"In 2022, event driven and equity hedge as a strategy struggled, while certain relative value and macro strategies in general delivered strong positive returns," explained Russell Investments' Kahn.
"Estimating which strategy will outperform in any given time period is almost impossible, so a balanced spread of exposures, with manager selection focused on diversifying approaches, leads to the most robust, consistent and stable return streams."
That said, Dowding pointed to opportunities in the mid- to long-term that could be captured by specific strategies.
For example, stress in the lower-rated part of credit markets lends itself to the event-driven credit space, while global macro and investment grade strategies with the appropriate asset allocation remain well-positioned to capitalise on macro volatility, he noted.
