By Don Steinbrugge, Founder and CEO, Agecroft Partners
Here are Agecroft Partners’ 16th annual predictions for the biggest trends in the hedge fund industry for 2025. These insights are based on discussions with over 2,000 institutional investors worldwide and hundreds of hedge fund organizations. The hedge fund industry is highly dynamic, and both managers and investors can benefit from anticipating and preparing for imminent changes.
The first four on our list will be materially influenced by the incoming Trump Administration, which aims to reshape U.S. government structure and trade policies. However, a slim majority in Congress and growing opposition discontent casts uncertainty on what policies will be successfully implemented. These developments will have significant implications for global capital markets, including:
1. Increased Market Volatility
Positives:
Increased market volatility can be beneficial for the hedge fund industry as it creates more opportunities to generate alpha. Larger price movements provide skilled hedge fund managers with better prospects to add value through security selection, particularly in strategies that exploit significant price distortions. This can lead to accelerated performance as security prices reach their targets more rapidly. Additionally, long volatility strategies, such as those employed by Commodities Trading Advisors (CTAs), stand to gain directly from heightened market fluctuations.
Negatives:
Increased volatility can also exert downward pressure on equity and fixed-income valuations. Investors may demand higher returns to compensate for the perceived rise in risk, which could negatively impact high-beta strategies. This is particularly concerning in the context of tight credit spreads in fixed-income markets and elevated valuations in equities.
2. Blockchain and Crypto Evolution
The blockchain and cryptocurrency industry is poised for remarkable growth and innovation in the coming decade. With support from pro-crypto policies from the incoming Trump Administration, the industry is expected to continue evolving at an exponential pace. The potential of blockchain technology extends far beyond cryptocurrencies alone, presenting many new investment opportunities. Investors who can assess the market dynamics, adapt to changes, and identify future leaders in the space are well-positioned for success.
Here are three major long-term trends shaping the crypto industry:
A. Increased Capital Flow to Crypto-Specific Funds
The industry is witnessing significant growth in funds dedicated exclusively to cryptocurrencies, signaling strong confidence in the sector’s future.
B. Integration of Cryptocurrencies into Hedge Fund Strategies
Various hedge fund strategies, including Commodity Trading Advisors (CTAs), global macro funds, and multi-strategy funds, are increasingly incorporating cryptocurrencies into their portfolios, broadening the asset class’s acceptance and utilization.
C. Introduction of Bitcoin Share Classes
Some investment funds, which already offer share classes denominated in multiple currencies, are expected to include Bitcoin as an additional option, making it easier for investors to allocate capital directly in digital assets.
3. U.S. Value Stocks
Many of Trump’s trade policies are designed to enhance the global competitiveness of American companies, which could provide a significant boost to value-oriented stocks. As we enter 2025, the valuation gap between growth and value stocks, measured by price-to-earnings (P/E) ratios, is near historic highs. This divergence comes at a time when the majority of hedge funds and active long-only managers are heavily weighted toward growth stocks. Such imbalances often set the stage for a reversal. A potential reallocation into value stocks could lead to substantial outperformance, possibly mirroring the extended periods of value dominance observed in the early 2000s (2000-2002).
4. ESG investing as a priority is likely to diverge further between the US and Europe/Asia
While the concept is well-intentioned—seeking to improve the world by encouraging companies to act in the public’s best interest—ESG investing continues to face challenges in execution. Although it initially attracted interest from U.S. institutional investors, many hesitated to allocate funds to ESG strategies due to their complexity and lack of clarity regarding tangible benefits. The inconsistency of ESG ratings, such as Tesla receiving a lower score than some oil companies, further fueled skepticism.
With the new Trump administration in place, interest in ESG investing is expected to diminish even further in the U.S. where a majority of investors that allocate to hedge funds are located. However, ESG criteria remain meaningful to some European and Asia based investors.
Other trends we see include:
5. Decline in Demand for Large Multi-Strategy Hedge Funds
There is a growing sentiment among investors that the asset raising success of large multi-strategy hedge funds has resulted in them becoming overcapitalized, leading to concerns about diminishing returns. Many of these funds’ portfolio teams face capacity constraints due to the size of their portfolios, limiting their ability to generate alpha. Additionally, worries about excessive leverage and overlapping trades across these platforms have raised fears of systemic risk, particularly in scenarios where simultaneous sell-offs could amplify market stress.
As a result, there will be increasing demand for smaller multi-strategy hedge funds that leverage external managers to construct diversified portfolios. These funds often employ market-neutral or low-net strategies within separately managed accounts, allowing for more precise risk management at the aggregate portfolio level. At the same time, single-manager market-neutral or low-net funds will continue to attract significant investor interest, further reflecting a shift away from larger, more complex platforms.
6. Rising Demand for Reinsurance (ILS) Managers
Over the past decade, reinsurance hedge fund managers experienced a surge in demand, followed by a decline due to underwhelming performance largely driven by historically low pricing in the industry. However, in recent years, pricing has rebounded sharply—doubling or more from its lows in certain cases—leading to consecutive years of strong performance. Despite this success, current pricing levels remain significantly above historical averages, creating a favorable environment for managers.
In 2024, many traditional asset classes became less attractive due to rising stock price-to-earnings (P/E) ratios and tight credit spreads. This shift has heightened interest in reinsurance-linked strategies, which offer uncorrelated returns. As a result, the sector is poised to attract substantial capital inflows in 2025, particularly from large institutional investors seeking diversification and higher returns.
7. Higher Demand for Strategies with Excess Collateral
There will be increased demand for strategies with large collateral reserves. With short-term interest rates hovering around 4% and market expectations suggesting limited further Federal Reserve rate cuts, these higher yields significantly improve the expected return from strategies often holding as much as 80% of NAV in cash or short-term fixed income positions.
Interestingly, many strategies poised to benefit from this trend have already been highlighted in this paper for other reasons. Examples of hedge fund strategies with substantial cash or short-term fixed income allocations include:
• Commodity Trading Advisors (CTAs):
CTAs trade futures across commodities, currencies, equity indexes, and interest rates. Given the leveraged nature of futures, most CTAs allocate only 10–20% of their capital to trading positions, with the remainder held as collateral and invested in short-term fixed income instruments.
• Reinsurance Funds (ILS):
Reinsurance hedge funds must maintain full capitalization to cover potential liabilities or claims. This capital is held as collateral and typically invested in very short-term, highly rated securities.
• Market-Neutral Long/Short Equity:
Managers employing a market-neutral approach often balance 100% long and 100% short exposures, resulting in gross exposure of 200% but a net exposure of 0%. Cash proceeds from short sales are used as collateral for borrowed securities. Returns on this collateral (the “short rebate”) are linked to short-term interest rates and generate additional return to fund investors.
8. Increasing Importance of Internal Marketing Teams
Many hedge funds underestimate the critical role of internal marketing professionals. As investors demand more tailored responses to information requests and attribution, the quality, clarity, and timeliness of these answers can significantly impact the likelihood of securing mandates. Addressing these questions effectively requires deep knowledge of the firm’s investment process and the ability to clearly articulate its differentiators. In addition, there is growing demand for advanced performance analytics, which often require investment into an outsourced provider. Hedge funds must not only provide the requested performance attribution, but also be able to explain the results to investors, making skilled internal marketing teams indispensable. The enhanced performance attribution can also educate managers on their strengths and weaknesses, resulting in improvements to their investment process.
9. Arms race for Alpha
Individual investors don’t stand a chance in gaining an investment edge over top hedge fund organizations. The industry is experiencing an information arms race with respect to how much information can be gathered and how quickly it can be processed. Information advantages are often short-lived, and many managers will continue investing in a host of new technologies such as quantitative analytics, alternative data sources and artificial intelligence seeking to enhance their decision making and improve traditional investment processes. Information and technology are used more broadly to increase efficiency and accuracy in sourcing information, researching ideas and executing investments. “Data Scientist” has become a key position at many leading edge firms responsible for leveraging information from web traffic, social media sentiment, online chat rooms, and GPS and satellite imagery to generate actionable forecasts on industries and companies.
10. Capital Introduction Events to Surge in Demand
The demand for capital introduction (cap intro) events is expected to significantly increase, with non-prime broker cap intro events projected to break historical registration records for both investors and managers. This surge aligns with the increased competitiveness of the industry and the potential for record asset flows to new managers in the coming year.
Investors increasingly value these events for their ability to streamline the manager research process, allowing them to efficiently screen a large pool of managers and quickly identify those most aligned with their investment criteria.
Most participants are expected to engage in multiple events hosted by different organizers to maximize exposure to a broader list of investors and managers. On the investor side, a higher percentage will opt for virtual participation, which enables more global investor participation while leveraging technology for preliminary meetings and initial screenings before committing to in-person interactions.
About the Author
Donald A. Steinbrugge, CFA – Founder and CEO, Agecroft Partners
Don is the Founder and CEO of Agecroft Partners, a global hedge fund consulting and marketing firm. Hedgeweek and/or HFM have selected Agecroft Partners 13 years in a row as the Hedge Fund Marketing Firm of the Year.
He has spoken at over 100 Alternative Investment conferences, been quoted in hundreds of articles relative to the hedge fund industry, has done over 100 interviews on business television and radio and has over 35,000 subscribers to his Hedge Fund Industry Insights Newsletter.
Don is also the Founder of Gaining the Edge LLC that runs the Hedge Fund Educational Webinar Series, Hedge Fund Leadership Conference and Alternative Investment Cap Intro Events. Over 8500 alternative investment professionals have participated. Most profits from these events have been donated to charities that benefit at risk children, which have total over $3 million donated since 2013.
Before Agecroft, Don was a founding principal of Andor Capital Management where he was a member of the firm’s Operating Committee. When he left Andor, the firm ranked as the 2nd largest hedge fund firm in the world. Before Andor, Don was Head of Institutional Sales for Merrill Lynch Investment Managers (now part of Blackrock). At that time, MLIM ranked as one of the largest investment managers in the world. Previously, Don was Head of Institutional Sales and on the executive committee for NationsBank Investment Management (now Bank of America).
Don is a member of the Board of Directors of the Virginia Home for Boys and Girls Foundation. In addition, he is a former Board of Directors member of the University of Richmond’s Robins School of Business, The Science Museum of Virginia Endowment Fund, The Richmond Ballet (The State Ballet of Virginia), Lewis Ginter Botanical Gardens, Help for Children (Hedge Funds Care), Child Savers Foundation, The Hedge Fund Association and the Richmond Sports Backers. He also served over a decade on the Investment Committee for The City of Richmond Retirement System.
