Hedge Funds Weathering the Volatility — Evening Brief – 02.14.25
Hedge funds have had a strong start to 2025, successfully navigating challenges such as January’s tariff turbulence and the DeepSeek-driven tech sell-off, according to recent data from Hedge Fund Research (HFR).
Despite these market disruptions, hedge fund managers across a variety of strategies were able to weather the volatility. HFR’s Fund Weighted Composite Index, which tracks global hedge fund strategies, generated a 1.42% gain in January following a near-10% annual return last year. Approximately 80% of the strategies tracked were positive for the month. Notable performers included multi-strategy, shareholder activist, and tech equity funds.
The analysis comes as Barclays’ 2025 Hedge Fund Outlook Report indicates a positive shift in investor sentiment, with 30% more investors planning to increase their hedge fund allocations compared to those intending to decrease them. This marks an increase from 25% the previous year.
Kenneth Heinz, president of HFR, stated that the hedge fund industry successfully navigated the “challenging environment” in January. This period was marked by volatility in the tech sector, triggered by the rapid emergence of the Chinese AI app DeepSeek, along with the impact of President Trump’s sweeping executive orders, which affected trade policy, immigration, energy, and more.
Equity hedge funds played a key role in January’s gains, with HFR’s Equity Hedge (Total) Index rising by 2.12%. All stock-picking strategies posted positive returns, led by multi-strategy equity (3.60%), fundamental value (2.77%), technology (2.22%), and quantitative equity (1.65%).
Event-driven strategies, which capitalize on stock mispricings and valuation anomalies from events like M&A, bankruptcies, and takeovers, contributed an additional 0.87% to the overall performance in January. The largest gains within these strategies came from activist hedge funds, which rose by 2.43%, and credit arbitrage managers, who posted nearly a 2% gain.
Macro hedge funds gained an average of 0.97% in January. Multi-strategy macro funds led the sector with a 2.46% return, while discretionary thematic macro and currency-focused strategies each added 1.58%. However, commodity-focused macro hedge funds were among the few to post a loss, ending the month with a slight 0.15% decline.
HFR data reveals that the gap between winners and losers narrowed slightly in January. The top decile of Fund Weighted Composite constituents saw an average gain of 7.9%, while the bottom decile declined by 4.1%, resulting in a top-to-bottom dispersion of 12%, which is down from 13.2% in December.
Barclays’ report highlights a significant increase in hedge fund allocations by institutional investors. Pensions and insurance funds are planning to raise their year-on-year allocations to 19%, up from 9%, while endowments, foundations, and sovereign wealth funds are increasing their hedge fund allocations to 25% from 25%.
Family offices are expecting a slight 4% decline in their hedge fund allocations, while private banks are reducing their allocations on a net basis, dropping to 50% from 60%. Statistical arbitrage has become a key strategy of interest for allocators, and multi-manager funds are expected to see significant inflows.
“Hedge fund flows were marginally positive in 2024, and we expect increased investor enthusiasm and allocation activity in 2025,” said Roark Stahler, U.S. head of strategic consulting at Barclays.