By Joel Kranc
Since the beginning of the year, global markets have been on a wild roller caster ride of ups and downs, making investors queasy in the process. Tariff policies and pullbacks — and further escalations — are becoming the norm as the Trump administration navigates its own trajectory on trade.
One sector that has seen consistent growth (at least until now) is the global hedge fund market. As reported in the latest HFR Global Hedge Fund Industry Report, total global hedge fund capital surged to a record level at the beginning of 2025, capping a strong performance year while navigating inflation, interest rates and generational geopolitical uncertainty in 2024.
Industry capital grew to a fifth consecutive quarterly record as hedge fund managers and institutional investors positioned for sweeping policy changes across a wide range of issues, including immigration, trade, taxes, regulation, M&A, cryptocurrency, energy, environmental, national security and manufacturing. Total global hedge fund capital ended the year at an estimated $4.51 trillion, an increase of $53.5 billion over the previous quarter and $401.4 billion for the full year.
“As these powerful trends evolve through early 2025, managers are preparing for a wide range of market cycles, with the possibility for volatility and dislocations as investors adapt to new policies regarding interest rates/inflation, legislation and tariffs,” noted Kenneth J. Heinz, president of HFR.
“While financial markets traded in a historic extreme range in April, recovering much of the steep declines by month end, hedge funds continue to position for the uncertainty associated with the implementation of new trade policies and economic uncertainty associated with these changes,” Heinz said in a separate media statement.
“Sophisticated institutional investors are likely to increase allocations and exposures to hedge fund strategies, including long volatility and pod shops, which have demonstrated their robustness and veracity through these recent historic market cycles, with these offering integral portfolio positive optionality and defensive, negatively correlated gains through the current market cycle of uncertainty and risk.”
Increasing Allocations
Not only are they likely to increase allocations, but according to the Barclays 2025 Hedge Fund Outlook, hedge funds are expected to receive the largest incremental allocation increase in 2025 compared to private or long-only options.
According to Barclays, 30% more investors expect to increase allocations to hedge funds in 2025 than to decrease them and the capital may be coming from Long-Only Equity and even more so from Long-Only Fixed Income, which are both expected to see a decrease in capital invested. The survey also shows investors are likely to make no additional increases in allocations to private equity/venture capital or private credit, which were both in favour, but flat year-over-year.
Looking at allocation plans by investor type, pensions and insurance expect to have a year-over-year allocation increase, leaping from 9% to 19% on a net basis. Endowments and foundations, and sovereign wealth funds also plan to increase hedge fund allocations as they went from +21% to +25% net allocators.
The survey also indicates that in 2025, the most popular allocation strategy appears to be Statistical Arbitrage, a quantitative trading strategy that uses models to profit from price discrepancies between securities. Another area that has seen a significant increase over 2024 is multi-manager funds.
Threats to the Bond Market
In Canadian markets, red flags have been raised regarding the proliferation of hedge funds in the government bond market. The Bank of Canada’s annual Financial System Report warns that hedge funds can account for nearly half the volume in some auctions for Government of Canada bonds, and nearly a third of the volume of trades between dealers and clients in the secondary government-bond market.
Government bond markets “need to function smoothly for other markets to work,” said Carolyn Rogers, the central bank’s senior deputy governor. She added that hedge funds have helped absorb increased bond issuance and kept yields low. Conversely, funds have taken on increased debt to finance their fixed-income purchases.
“This makes them more likely to pull back from these crucial markets in periods of stress, introducing added volatility,” Rogers said. She added that an escalation in the U.S.-Canada trade conflict could prompt hedge funds to quickly sell their Canada-government bond holdings, posing strains on liquidity.
While it’s difficult to predict market behavior — especially given the volatility of trade and macro-economic policy in today’s climate — hedge funds’ diversity, access to expertise, flexible strategy, and other factors are still attractive to the large-scale investor.
Joe McGuane senior vice president in Callan’s Alternatives Consulting group, in a posting called “Five Major Trends Driving Hedge Funds in 2025,” notes that, “Hedge funds have the ability to add non-correlated return streams to institutional portfolios that protect against traditional long-only asset class sell-offs. Strategies such as macro and relative value trading tend to perform well when the market becomes volatile and dispersion increases across asset classes. Compared to private equity and venture capital, hedge funds offer better liquidity while still having the ability to be opportunistic around event-driven situations.”
