Hedge Fund Investment Outlook 2025

By Nell Mackenzie

LONDON (Reuters) – Half of global investors surveyed by Bank of America’s prime brokerage plan to increase allocations to hedge funds this year, while 37% wish to maintain their current investments.

The findings show a 2% increase in investors looking to invest more in hedge funds since the beginning of 2024, according to a report released by BofA on Friday.

The survey was conducted with responses from 256 firms managing a combined total of over $1 trillion in hedge fund investments.

The percentage of investors looking to redeem their hedge fund holdings decreased from 12% in 2023 to 7%, as reported in BofA’s 2025 hedge fund outlook.

Dissatisfaction among investors was largely attributed to underperformance, with 73% of unhappy investors citing this as the reason for their desire to withdraw investments. Other complaints included changes in investment strategy and portfolio consolidation by hedge funds.

Concerns were raised that hedge funds are increasingly entering crowded trade positions, potentially leading to losses if many investors attempt to exit simultaneously. Additionally, worries were highlighted that large hedge funds may struggle to invest without disrupting the market.

Investors also expressed unease regarding hedge funds claiming specialized investment strategies while employing alternative methods, known as style drift.

Talent retention remains a significant concern as well.

Interestingly, smaller hedge funds managing under $500 million in assets are a fifth less likely to experience investor withdrawals. Family offices, pension plans, and endowments were more inclined to withdraw all investments rather than partially.

Looking ahead to 2025, investors display greater interest in stock and bond trades, showing less enthusiasm for trend-following and systematic funds related to macroeconomic events.

Hedge fund clients have seen improved success in negotiating fees, with approximately 60% securing discounts compared to roughly half the previous year. There was also a rise from 17% to 22% in clients obtaining more favorable liquidity terms, enabling a quicker buy-and-sell process for hedge fund investments.