Hedge Funds Enter 2026 With Strong Momentum

- Hedge funds achieved average returns of 11.8% in 2025 and 11.9% in 2024, outperforming traditional 60/40 equity-bond portfolios for each year since 2022. The industry's total assets under management (AUM) surpassed $5.15 trillion for the first time in 2025. - In 2025, Discretionary Equity was the top-performing strategy, with a 17.1% return and 5.7% alpha. Quant Equity strategies also performed strongly, leading all strategies in alpha generation at 5.8%. - Investor interest is shifting, with nearly half of asset allocators planning to increase their exposure to hedge funds in 2026, the highest level in recent history. There is particularly strong demand for quantitative and discretionary macro funds. - The industry saw its first net inflows in several years in 2025, totaling an estimated $79 billion. This follows a period of stagnation in the 2010s, which saw average annual outflows of around $30 billion between 2016 and 2023. - Multi-strategy "pod shop" models were highly successful in 2025, attracting $53.4 billion in net inflows. Notable returns included ExodusPoint Capital at +18% and Balyasny Asset Management at +16.7%. - Hedge funds are operating at the highest levels of gross leverage since 2020, with some prime brokerage data indicating leverage at the 99th percentile of readings over the last 15 years. This has amplified returns but also increases the risk of a rapid deleveraging event. - The year 2024 was a standout for hedge fund launches, raising the most assets for new funds since 2018. Mega-launches like Taula Capital and Jain Global each raised at least $5 billion. - There is a growing trend of hedge funds launching dedicated private market vehicles, particularly in private credit. This move is driven by managers seeking to diversify their asset base and capitalize on opportunities in non-bank lending.