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Hedge funds have delivered 300 basis points of annualised alpha since 2020, according to Barclays prime brokerage, in further evidence of the sector’s marked turnaround.
The last two years brought the first back-to-back gains since 2009-2010, with the return of a market environment more conducive to alpha generation defined by low stock-to-stock correlations and high dispersion and volatility.
“Where the 2010s were characterised by unfavourable conditions across all three drivers, the 2020s have seen these same forces turn supportive again, much like in the 2000s,” noted Barclays in their report.
Alpha levels this decade are up sixfold on the 50 basis points annualised seen in the 2010s. The expansion in private market strategies last decade (+250% in private equity and credit compared to 70% expansion in hedge funds, per Preqin) means there is “ample capacity” for growth.
LP sentiment signals
“Sentiment towards hedge funds is decisively positive, with net interest from investors reaching its highest level since 2018. This optimism is led by family offices and private banks, though each investor type appears to have increased interest,” note Barclays.
“Investors are increasingly favouring managers who can deliver uncorrelated returns regardless of market environment. This has spurred equity market-neutral, quant multi-strategy and global macro strategies to be the most in favour for 2026.”
According to their data, about a quarter of investors are now using separately managed accounts with scale the most important factor (investors with more than $5bn in hedge funds are more likely to use SMAs.
Prevalence is growing among managers, with about half of hedge funds now offering SMAs, with even more planning to accept SMA allocations going forward.
Technology deployment
Barclays believes the industry appears to be undergoing a structural evolution, marked by the convergence of discretionary and quantitative investment approaches.
“Discretionary managers are increasingly embedding quantitative tools, including artificial intelligence (AI), alternative data sources and systematic signal capture into their research and in some cases, their decision-making processes.
“Similarly, quantitative firms are incorporating discretionary insights into their models and even creating products around them. Managers’ pursuits of greater capacity and new sources of alpha are driving this convergence.”
According to their data, AI adoption is accelerating across the industry, with 75% of investors now employing AI for non-investment workflows and 55% have integrated it into their investment process for applications such as hedge fund research, due diligence and risk monitoring.