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The hedge fund industry is set for growth in 2025, according to a new report by IG Prime based on its survey of clients and contacts. Here are eight key takeaways:
Fee models in flux
Almost three-quarters (74%) of the managers interviewed by IG Prime levy a management fee such as the 2-and-20 model. Almost half (44%) of respondents were considering changing their fee structure. Why? For 64% it was about seeking a competitive advantage, while 42% said regulatory pressure (multiple responses permitted). A further 16% said it was in response to client pressure.
Multi-strategy expected to outperform
IG Prime’s survey of hedge fund managers found that multi-strategy (favoured by 39% of respondents) was expected to be the best-performing strategy in 2025, followed by emerging markets (37%) and long/short equity (33%).
Performance satisfaction
A clear majority – 63% of allocators canvassed by IG Prime – reported that the hedge funds they were invested in had performed in line with their goals (33%), outperformed (20%) or significantly outperformed (10%).
Just 16% of investors said that their hedge funds had underperformed – of whom, only 4% said they had done so to a significant degree. Less than a quarter (24%) of clients expected to change their hedge fund in 2025, with the remainder planning on sticking with their existing fund.
Small over scale
Encouragingly for the smaller funds, 42% of investor clients seeking to move were targeting a smaller manager, while only 25% planned to seek a
larger player (the remaining 33% said size was not an issue).
There was an interesting split in 2024 as the top performers were in the $10bn+ bracket, followed by the smallest fund size bracket, according to PivotalPath data.
LPs have shown good foresight, however, since some of the largest funds have suffered this year, particular multi-strategy platforms in the recent market volatility, with the greatest deleveraging event since the start of Covid harming performance amongst holders of popular technology and healthcare large-caps.
Risk management concern
Respondents were asked to select one or more factors which had led them to consider a switch in hedge fund manager. Risk-management concerns were cited by 58% of those respondents who were looking to change managers. Poor performance was the second-most important factor (42%), while a third were unhappy with fees or the structure of fees, and another third were disenchanted by a lack of transparency and poor investor relations.
AI’s ‘game-changing’ impact
Almost a third (31%) said AI would have a “game-changing” impact on their business, followed by 41% saying it would be significant and 16% moderate. Just 8% said it would have little or no impact.
Around 86% of fund managers now use generative AI tools in their work, according to Empaxis, which provides middle- and back-office operations,
accounting and systems-integration solutions.
AI an ops, rather than alpha, tool
Fund respondents shared the general view that, in 2025, AI will have
the greatest impact in labour-intensive areas such as data processing and analysis. It was seen as more of a middle- and back-office tool, with only 12% believing that it would help in generating alpha.
A costly business
“Investment compliance and other regulatory requirements” was seen as the greatest cost pressure facing hedge funds, selected by 43%, closely followed by technology on 42%.