“The Party Is Just Getting Started” for Hedge Funds — Evening Brief – 01.31.25
With hedge fund assets reaching record highs, higher interest rates, inflation, and deglobalization are converging to create new idiosyncratic opportunities for alpha generation, according to Davidson Kempner Capital Management. These market dynamics are driving unique investment opportunities, as fund managers seek to capitalize on evolving economic conditions.
The “party is just getting started” for hedge funds as a new market regime brings fresh opportunities, according to a Davidson Kempner Capital Management (DKCM) white paper. The report suggests that absolute return performance is now on an upward trajectory, approaching levels last seen in the early 2000s, following the final rate hike in July 2023, signaling favorable conditions for hedge fund strategies.
“While challenging for the global economy, higher interest rates can act as a tailwind for absolute return strategies by creating winners and losers – thus increasing return dispersion and alpha opportunities,” the commentary noted.
“As capital allocated to absolute return strategies has contracted in relative size within the broader alternative investments universe, we believe the current environment has become even more supportive for absolute return and, in particular, event driven strategies.”
New data from Hedge Fund Research (HFR) reveals that total global hedge fund assets under management (AUM) reached an all-time high of $4.51 trillion in 2024. The industry saw a $401.37 billion increase over the past 12 months, marking the largest gain since 2021. This growth was primarily driven by strong performance-based returns, with hedge fund managers achieving an average gain of approximately 10%, according to HFR.
Event-driven hedge funds, which capitalize on stock mispricings and valuation anomalies from mergers and acquisitions, bankruptcies, takeovers, and other corporate events, saw their assets grow to approximately $1.28 trillion in 2024. The sector posted gains of over 11% last year, with total assets under management increasing by $10.3 billion, supported by $90 million in investor inflows.
Equity hedge funds eclipsed $1.3 trillion in assets for the first time on record in 2024, marking a $126.7 billion year-on-year increase. Despite a small net outflow of $2.8 billion in the fourth quarter, stock-picking strategies added $14.2 billion during the quarter, driven largely by strong gains in equities in November.
Macro hedge funds saw their total assets increase by approximately $40.7 billion in 2024, bringing total macro hedge fund capital to an estimated $711.3 billion. Despite investor withdrawals surpassing $7 billion in the fourth quarter, assets still grew by $8.6 billion during the quarter.
HFR president Kenneth Heinz said managers, institutions and investors have positioned for “sweeping policy changes” under Donald Trump’s new administration, with “significant and far-reaching implications” for U.S. and global financial market structure, regulation and capital.
Davidson Kempner highlighted a global M&A revival, driven by pent-up demand, a potential shift in antitrust regulations under Trump, and strong equity and credit markets. The firm sees these factors creating favorable conditions for deal-making, presenting new opportunities for event-driven hedge funds.
“We believe higher performance dispersion across and within asset classes, industries, countries and themes, and a likely resurgence of M&A activity, can create an improved opportunity set for absolute return strategies to deliver attractive risk-adjusted returns,” DKCM added.