Hedge Funds Post Best Returns In Years While Barely Hedging

Benzinga_recent_news02-07 05:03

After years of weak returns, closures, and investor outflows, the hedge fund industry has posted two consecutive years of double-digit gains, averaging roughly 11-12% in 2025. If you ask Barclays, ...

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The 2010s have seen low volatility, high stock correlations, and near-zero interest rates. That environment favored passive investing and squeezed active managers. Yet the 2020s, by contrast, have seen higher rates, dispersion, and more volatility across assets.\n\"The 2020s have seen these same forces turn supportive again, much like in the 2000s,\" Barclays analysts wrote in the new 2026 hedge fund outlook.\nAccording to the data, Discretionary Equity stood out in last year's performance, delivering about 17% returns and 5.7% alpha. Market-neutral and low-beta managers did even better, producing more than 8.5% alpha, while quant equity strategies added roughly 5.8%.\nBarclays also pushes back on the idea that hedge funds are too crowded to generate excess returns. Since 2015, industry assets have grown by around 70%, while global equities and bonds have expanded by roughly 150% and private markets by closer to 250%.\n\"Industry growth has not outstripped the breadth, depth, and scale of the investable universe,\" the bank noted.\nTheir conclusion is direct. Macro and market backdrop now favors active, opportunistic strategies. And allocators are taking notice.\nInstitutional investors poured money into hedge funds last year, with inflows at their highest level since 2007. The rebound in performance, combined with liquidity concerns in private markets, has pushed hedge funds back up the pecking order.\nBut not everyone is convinced the industry is delivering what it promises.\nResearch from BNP Paribas suggests the recovery may be less comforting than it looks on the surface.\nAccording to the Financial Times, the research points at the highest correlation between hedge fund returns and the MSCI World index in at least five years. Equity long-short funds, the industry's flagship strategy, had a 0.98 correlation with market returns in 2025. A three-year average is 0.92, while a five-year average is 0.86.\nIn statistical terms, a correlation of 1.0 means two assets move in perfect lockstep. At 0.98, the distinction is barely meaningful.\nThe broader hedge fund industry wasn't far behind, with a 0.92 correlation to the index last year versus a five-year average of 0.76. While a roaring three-year green run in global equities helped hedge funds produce their best annual return since 2009, for some observers, that's precisely the problem.\nThe concern is simple: hedge funds charge premium fees—traditionally around 2% management and 20% of profits. The promise behind it is high returns, lower volatility, and protection during market stress.\nIf those portfolios are now moving almost in sync with global equities, that protection may be more theoretical than real.\n\"Allocators have to consider if their portfolio is being protected… if there is suddenly an equity market drawdown,\" said Marlin Naidoo, BNP's global head of capital introduction.\nThe last time correlations spiked this high was during the Eurozone debt crisis in 2011, when crowded trades unwound rapidly and losses compounded.\nAt the macro level, the case for hedge funds is strong. Performance is improving, flows are returning, and higher volatility should favor active management.\nBut at the strategy level, especially in equity long-short, the picture looks less flattering. \nThree years of a charging bull market, propelled by a narrow group of AI winners, have made long the only consistent trade. Shorting has been painful, crowded, and often career-risking. Many managers appear to have quietly reduced hedges and ridden the rally.\nThe result is an industry that, in its flagship strategy, is moving almost tick-for-tick with the market, while still charging hefty fees.\nImage: Shutterstock\nTo add Benzinga News as your preferred source on Google, click here.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0,"need_auth":false,"code":"91000000","status":"200"},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"tenantId":"TBGLOBAL","deviceId":"web-server-community-laohu8-v3","version":"4.36.2","shortVersion":"4.36.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2609511929","isCrawlerRequest":true}