In speaking with a range of allocators and investment consultants recently, we are starting to see the long-awaited rotation into hedge funds.
There are a number of articles and studies out there that have talked about the tailwinds for hedge funds and increasing interest levels from allocators. The tailwinds include:
These tailwinds have resulted in increased interest in hedge fund strategies among institutional allocators. But, as we reported in our last update, that increased interest level was resulting in expected flows towards hedge funds in 2025 – not yet seeing actual movement given concerns about overall portfolio liquidity. We are now seeing and hearing about actual increases in flows to hedge funds from a wide range of allocators.
We spoke with multiple investment offices, investment consultants, and OCIOs (outsourced chief investment officers) who have either increased their target allocations to hedge funds or tactically overweighted hedge funds towards the upper limits of allowable ranges. In most cases, the funding source for these increases has come from equities – not surprising given the strong performance of equities over the past two years. Hedge funds of all strategies are seeing increases in allocations.
It remains to be seen whether allocators will be rewarded for increasing their allocations to hedge funds. We believe that continued strong performance from hedge funds will be rewarded with additional flows especially if hedge funds can protect during a market decline or earn attractive absolute returns in a flat market.
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