- The $5.7 trillion hedge fund industry has had an up-and-down year so far.
- Six months into 2025, managers have battled choppy markets and an uncertain geopolitical climate.
- Still, assets and performance are on the rise, and new funds are popping up.
Hedge funds have had an emotionally turbulent ride in 2025, starting the year with soaring interest from big investors and optimism for the incoming Donald Trump administration.
That optimism did not last long, however, as the President's tariff policies disrupted global trade and sent markets into a frenzy.
Big-name managers such as Bill Ackman, Dan Loeb, and Ken Griffin, each of whom voted for Trump, were critical of the tariffs, but the administration used one of the industry's own — Treasury Secretary Scott Bessent, a former macro investor who worked for George Soros — to sell the policies at the Milken conference and on TV. Tariff negotiations are still ongoing, but the administration's 90-day pause is set to end Wednesday.
Meanwhile, choppy markets and the rise of artificial intelligence renewed interest in long-short equity managers, as hedge fund backers sought investors who can pick winners and losers in the new world order. The first quarter of this year was one of the sector's best fundraising stretches in a long time.
Markets have since settled down, and June was a strong month for stocks. One hedge fund founder, BoothBay's Ari Glass, told investors after the first quarter that the portfolio managers and firms his fund backs believe "it is beginning to feel like sentiment is similar to the second quarter of 2020 and we know that while history does not repeat itself, it can rhyme."
While the pandemic slammed stocks in March 2020, many hedge funds had a stellar year by betting on a quick and significant recovery.
Still, there's the possibility of more macro tremors shaking global markets. Trump is still pursuing his tariff agenda. He will sign his "Big Beautiful Bill," which contains about $4.5 billion in tax cuts and is estimated to add billions to federal deficits, into legislation on Friday. And the potential for a broader conflict in the Middle East has investors on edge.
According to a recent report from Goldman Sachs' prime brokerage desk, the week the US bombed Iranian nuclear sites was the second-largest net selling of energy stocks by hedge funds in the last 10 years, with many American funds now shorting energy stocks.
Multistrategy giants hitting their peak?
The biggest hedge funds still dominate the conversation as managers like Millennium, Citadel, Point72, and Balyasny continue their long-running war over talent that has sent compensation costs skyrocketing. Many multistrategy funds, even smaller peers without the track record of the so-called big four, can only afford these payouts to coveted personnel thanks to pass-through fees, which leaves limited partners holding the bag for all the costs of running the business.
A Goldman Sachs survey of multi-manager firms running a combined $300 billion from earlier this year found that 61% have changed their terms by adding either pass-through fees or "more onerous" liquidity terms.
End investors have been pushing back for years and finally broke through last year, getting managers as large as Michael Gelband's ExodusPoint to agree to a cash hurdle that requires a fund to outperform Treasury bonds to earn performance fees. Another Goldman report found that close to half of allocators are now looking for managers they back to adopt hurdles.
In other words, after years of explosive asset growth, multi-strategy funds might finally be plateauing. According to Nasdaq's eVestment, the sector had net outflows of $1.2 billion in the first quarter.
Managers with tens of billions in assets like Citadel, Point72, and D.E. Shaw even returned capital to start the year. Other mega-funds, especially Millennium, have focused increasingly on allocating to external managers via separately managed accounts, which has warped the emerging manager space.
SMAs often allow allocators more transparency and customization into a fund's operations and trading, though the independence of these new managers from their behemoth backers is in question. JPMorgan expects 58% of new launches over the next year to be SMAs, despite, as Goldman wrote, the "lines are now more blurred between platform hedge funds vs fund of hedge funds, proprietary vs external."
The shift has meant seed investors feel they can push for even greater transparency into managers' books. According to law firm Seward & Kissel, close to half of those who backed new launches last year required the new funds to provide daily trading reports.
Despite all the ups and downs, the average hedge fund returned 2% through May this year, according to industry data tracker PivotalPath — besting the S&P 500 through the same time period.
