Executive summary
With geopolitical and economic uncertainty set to persist into 2026, hedge funds continue to prove their value as risk-mitigation tools. Ongoing volatility will create fertile ground for event-driven, long/short equity and macro strategies.
Allocators are introducing and increasing their hedge fund exposure, with large institutions continuing multiyear programs to build out sizeable non-directional sleeves. Managers are seizing the opportunity by bringing new funds to market, with more launches being prepped than at any time since Covid. Changes to the way investor are allocating capital, with the rise of separately managed accounts, are also benefiting the start-up scene. Competition is fierce to offer early-stage capital to well-pedigreed PMs looking to strike out on their own. At the end of 2024, we forecast industry AuM reaching $5 trillion by 2028, but the growth through 2025 now puts that milestone a full year earlier.
The multi-manager growth story will continue into 2026, as external allocations by these oversubscribed platforms shows no sign of slowing. Smaller platforms are increasingly moving towards similar third-party allocation models. And this trend will see new entrants looking to replicate their success and potentially sidestepping some of the fees. These platforms will benefit from capacity constraints at some of their bigger peers and will see outperformance in the coming year.
Physical commodities will be the biggest diversification play in 2026 as both larger firms and start-ups hunt for alpha that quant approaches cannot easily access. At the same time, the move into private markets – and private credit in particular – will continue. This is driven by firms’ desire to diversify their asset and investor bases with an eye on succession planning and business valuations.
Momentum accelerates route to $5 trillion
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We anticipate this trend continuing through 2026 as allocators build out non-directional sleeves and the market environment creates richer opportunities for event-driven, macro and long/short equity strategies.
Overall hedge fund industry assets are now on track to hit $5 trillion by the end of 2027.
Launch activity is a key barometer of industry health, and we tracked 344 funds in development in the first nine months of 2025, the most since Covid-19. Our forward-looking investor intentions data also shows rising interest in event-driven, relative value and multi-strat in particular, while our conversations with both managers and investors paint a positive picture overall, albeit with familiar gripes over fee levels and fee-alignment mechanisms such as watermarks.
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2025 has seen a healthy flow of large hedge fund mandates, and 2026 is shaping up to be another active year as the biggest allocators continue to ramp up allocations. Many US allocators remain underweight hedge funds, with the growing trend toward risk-mitigation portfolios a key driver of manager search activity.
Ohio’s two largest public pensions both have billions of dollars to deploy as they build out their riskmitigating/liquid alts exposure. Others to watch next year include CalPERS, which created headlines in 2014 when it famously exited the asset class amid underperformance, but has recently floated the idea of re-introducing risk-mitigating hedge funds in its latest asset study. The pension giant’s proposed ‘total portfolio approach’ provides a framework for such mandates to be implemented.
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Alaska’s $85 billion SWF is another. The allocator will be looking to lift its hedge fund allocation in next year’s asset study, having previously been put off by capacity and access constraints with top-tier hedge funds.
At the larger end of the scale, pensions such as Texas Teachers and Florida SBA are also making moves. Texas is already a notable hedge fund proponent, while Florida will consider adding long/short mandates to its $100+ billion public equities portfolio in 2026.
In Europe, UK local government schemes are increasingly considering liquid diversifiers, including ILS and securitized credit, while Norway’s $2 trillion Norges has begun seeking long/short equity opportunities – its first foray into hedge funds. Quant, multi-strategy and macro are generally the most popular strategies among other European investors.
Allocators to ramp up European hedge fund exposure
European equity hedge funds are attracting inflows as investors increasingly look outside the US. The overall story is positive for strategies focused on the continent, with consultants telling us the amount of alpha generated by European long/short equity managers sets them apart from many US counterparts.
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Several large US pensions are in discussions with European managers, and we anticipate significant allocation activity in the early part of 2026 from a host of large North American investors. This is borne out by our regional intentions data, which shows continued growth in appetite for European and internationally-focused strategies.
Several European equity funds are now restricting flows into their strategies, including Helikon Investments, which has hit capacity at $8 billion; and Kintbury Capital, which introduced capacity constraints as AuM nears $3 billion. We expect well-pedigreed launches to benefit from this trend and see the potential for larger managers to strip out focused sleeves from broader funds to take in assets.
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Want to see more of this data? Schedule a demo today.
Want to see more of this data? Schedule a demo today.
Global macro set to prosper
Geopolitical tensions, persisting inflation and policy divergence have created fertile ground for discretionary macro managers, laying the foundations for a standout period of returns. As volatility becomes the norm, new and existing macro managers are set to raise significant capital in the coming months. A number of investors are upping allocations or planning to revisit directional macro next year.
The average macro hedge fund we tracked returned 11.5% through Q3, putting it on course for its best annual return in 15 years.
The strategy has delivered some of the biggest single strategy launches of late, with Millennium vet Gilberto Marcheggiano’s Agave Capital Management the latest in a long line of $1+ billion macro debuts.
In contrast, systematic macro has seen muted performance and outflows, underperforming discretionary counterparts for six consecutive years. These headwinds are creating an instability in a strategy set to see further withdrawals in the next year.
Low-net equity long/short managers and market-neutral strategies that deliver notable alpha are attracting interest from allocators seeking to limit beta and market drag. Market-neutral managers have recently performed well, and heightened market volatility has increased allocator wariness to potential corrections.
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Systematic equity managers are benefiting from positive investor sentiment after a strong run for factor driven strategies. Large US investors are indicating a preference for systematic equity, with growing interest in markets outside the US.
US policy efforts to revive capital markets have sparked momentum in the second half of the year, with relative value, event-driven and multi-strategy managers among those looking to capitalize.
Larger pensions in North America and beyond are allocating to event-driven managers amid deal resurgence, with prime broker sources also tipping the strategy going into 2026.
With 15 event-driven launches in the first three quarters of 2025, full-year launch numbers are set to exceed the 16 recorded last year. Corporate reforms in Japan and Korea also enhance the activist and event-driven opportunity set.
Second-tier multi-managers to gain ground
The multi-manager growth story rolls on in 2026 with several smaller firms expected to gain ground, some consolidation likely and a broadening of investment strategies, particularly around commodities.
With larger players capacity constrained, and some giving back capital through voluntary distributions, second and third-tier platforms are well-positioned to benefit, particularly after the outperformance of many of these managers in 2025. Smaller multi-strategy hedge funds have broadly outpaced their larger peers through the first three quarters by leaning into their respective niches and differentiating themselves.
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Dispersion in returns across the different multi-strat tiers has narrowed in 2025. The average return for a tier-two multi-strategy hedge was 7.7% over the first three-quarters, with tier-one firms advancing 6.6% and tier-three shops rising 6.5% through the same period.
Our investor intentions data indicates investors will be stepping up their already sizeable allocations to multi-strategy funds over the next 12 months, and with doors shut at the larger platforms, they are seeking alternatives.
A number of tier-two platforms have significantly expanded their roster of investment talent in anticipation of this opportunity. We have tracked over 100 allocations by multi-manager platforms to external investment teams over the past two years, primarily through SMAs, and we expect competition to allocate to top talent, particularly niche strategies, will intensify. Additionally, with banks now building solutions and products in this area, rivalry is intensifying.
Smaller multi-strategy hedge funds have quietly stepped up their external allocation efforts throughout the past year, and we expect this to continue. Some PM targets prefer to work with these firms where they can negotiate more flexible terms, particularly around exclusivity and other future arrangements, including access to more capital or assistance with further external fundraising.
The past two years have seen two high-profile multi-strategy hedge funds shut down amid the cost, performance and talent retention pressures of managing a multi-portfolio manager model. Those that have pivoted their businesses into multimanager arrangements appear particularly at risk if performance falters.
With such pressures continuing, and pass-through fee scrutiny from allocators increasing, we expect some consolidation and more closures from firms unable to sustain the pace of fundraising and allocation. More platforms will also be open to selling minority stakes to private equity firms and other investors in the same way as Millennium, Verition and Brevan Howard have done recently.
On the investment side, multi-managers are betting big on commodities, acquiring physical trading businesses and bulking up internal trading teams. New entrants into this space are also expected, with at least one large multi-strategy hedge fund considering opening a commodities trading unit. Multi-managers sell themselves as a dependable source of low-beta returns and the inefficiency of commodities markets, particularly at this time, is seen as a great way to generate diversified alpha.
SMA allocators fuel launch uplift
Emerging managers face lower barriers to entry, ushering in a potential golden age of new firms. The breadth of SMA deals available to hedge fund PMs is increasing at pace from a growing range of allocators. We are hearing of several large banks prepping their own externally allocating multi-PM funds, following in the footsteps of Morgan Stanley’s $2.5 billion Riverview Omni fund, which is among the most active hedge fund allocators.
From the banks’ perspective, the opportunity to avoid paying passthrough fees to multi-strats and build their own multi-manager portfolios via external allocations is a big draw for clients who also want greater hedge fund exposure. PMs enjoy such arrangements because funds such as Riverview rarely mandate exclusivity in the way multi-strats and other allocators tend to.
Industry sources are often expressing surprise at the range of managers who are winning tickets, a sign of a growing amount of money looking to be put to work. As one market participant told us: “It’s never been easier to launch via an SMA and never been harder to raise for a commingled fund.”
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Risks remain, however. SMAs put asset control firmly in the hands of the investor and this results in potential drawbacks. Fees are typically nonnegotiable and aggressive terms for some allocators can alienate existing investors. Allocators can also redeem quickly, depending on the liquidity of the strategy, and often demand exclusive access, creating a high concentration risk. It is also worth noting that launching an SMA with preferential investor terms first, can hinder the process of launching a fund later down the line, given the commercial treatment previously offered to allocators in the managed account.
We expect the FoHF sector to evolve as firms seek to reinvent themselves as multi-strat businesses associated with external SMA deals, distancing themselves from the old-fashioned FoHF label associated with higher fees and underwhelming returns.
Lighthouse and New Holland Capital are two notable FoHF names now more associated with SMA deals, and we expect more to follow.
Only around 50 billion-dollar FoHFs remain, down from a 2007 peak of 150, with assets below $600 billion – well under the $1.1 trillion peak of over 15 years ago. Indeed, it may be time to coin a new term for asset managers investing externally who do not fit within a strict FoHF definition; perhaps third-party investors (TPIs) will stick.
The traditional FoHF sector has been in almost persistent decline since before the financial crisis. We expect several firms will fail to make the transition to a multi-strat model.
Largest firms to cash in on private markets
We anticipate more hedge fund firms will diversify into private markets, following a well-trodden path of recent years. Point72, D1 Partners, Millennium and Third Point have all entered private credit and hired notable talent for their respective teams. Elsewhere, the likes of Diameter Capital Partners and GoldenTree have long offered both private and public credit vehicles.
We are hearing that several other sizeable players are prepping similar moves as they look to diversify their asset bases, tap into the advantages of running longer-lock-up vehicles and potentially cross-sell to existing investors.
Such moves, if well executed, could also boost business valuations at a time when many managers are examining succession plans. However, investors are wary of managers entering new areas without a track record, and not every move will succeed.
Big commodity launches on the way
Previously the preserve of smaller launches and CTAs, due to capacity constraints, commodities are poised for several sizeable debuts as experienced PMs and traders exit the larger trading houses and multi-strategy managers to strike out on their own, in some cases with significant assets. Risk limits sometimes inhibit the volatile opportunity set at both multi-strategy firms and trading houses, and with the ever-growing range of allocators looking to deploy capital at hedge funds, many traders see attractive launch opportunities.
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Arbitrage opportunities unavailable via derivatives, ongoing gains in precious metals, and volatility in European gas and power markets all fuel the trend. We are speaking to several senior traders who are in conversations with allocators eager to deploy capital.
Singapore’s Nexus Commodities, led by senior Goldman veteran Qin Xiao, has taken a $1 billion nonexclusive Millennium SMA. Gunvor alumnus Scott Harbert’s Geneva-based Crucible Commodities has raised significant assets, while Harvestone Capital, a Paris launch managed by Sucden veterans, has Millennium backing and is a hotly-tipped 2026 launch. Several commodities-savvy investors have expressed to us a preference for traders with physical experience due to market dislocation and different bottlenecks that “may prove too complex for those with pure quant or derivatives backgrounds.”
Prop trading competition grows
Market-making firms, historically noted for high frequency trading (HFT) models, are increasingly encroaching into statistical arbitrage and other traditional quant hedge fund strategies as they seek to deploy vast post-Covid profits.
Many of the larger and better-capitalized prop firms, such as Jane Street and Hudson River Trading, are unlikely to move into managing third-party capital – though they continue to compete on other fronts.
A move to raise assets externally depends on how much in-house capital a firm has, whether they have an appetite for a more regulated LP-servicing world, and to what extent they are pivoting to more midfrequency trading.
Tower Research is launching a fund for external investors as it moves beyond high-frequency trading to more mean-reversion strategies and looks to expand its capital base. This is an eye-catching development, and it is understood other prop houses are considering similar moves. Larger players may be less tempted though, given that such endeavours are less likely to move the needle.
Outside of direct competition for clients, there are several other factors to consider. Statistical arbitrage trades have seen intense crowding, this year in particular, which we understand have contributed to muted returns at larger multi-strategy hedge funds.
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The increasing overlap in areas such as momentum, mean reversion and relative value was touted as a reason for tremors caused in quant performance over the summer.
With quant firms and proprietary trading houses both employing large amounts of leverage, the likelihood of crowded trades as the pair overlap on strategy is high and increasing.
There is growing competition for resources between hedge funds and prop trading firms as they look to recruit swathes of researchers, traders, data science pros and tech wizards. Competition for investment banks’ wallet share is also heating up, with prime brokers increasingly seeing prop trading firms as high-value clients. Going the other way, there is limited evidence of hedge funds looking to take on HFT firms at their own game.
Middle East enters next growth phase while APAC confidence builds
Well-capitalized Middle Eastern allocators are keen to access hedge funds and are becoming more sophisticated in their strategy preference. The growth of the managed account sector has been evident in the region, with Abu Dhabi SWF ADIA now running upwards of $40 billion of hedge fund assets in its SMA tie-up with Innocap, a leading managed account platform.
Recent multi-billion arrivals in Abu Dhabi include Rokos Capital and Tudor spinout antium, with more surely on the way – 72 Billion Dollar Club managers now operate in the region, 54 in Dubai and 18 in Abu Dhabi as of October.
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Well-connected sources in the region speak of the Dubai family office opportunity, noting how they are looking towards European and international strategies for diversification, particularly in the quant, equity and macro spaces.
Hedge fund staff are drawn to the UAE lifestyle, a key driver for office openings. We expect further growth into 2026 as PM recruitment and retention remain priorities. Standalone launches outside established firms are also emerging in the region.
Hong Kong sentiment rising
Soaring Hong Kong equity markets and IPO applications have further lifted hedge fund sentiment in the region, which we expect to continue through 2026. Several well-pedigreed launches are being prepped, while large hedge fund platforms are adding headcount to capture Asia-Pacific opportunities.
The availability of capital from local family offices, FoHFs and institutions, both in Hong Kong and mainland China, has been a big growth driver, alongside the bounce back in Chinese equity markets. Allocator sources tell us that equity hedge funds are high on their agenda, particularly TMT and those looking to take advantage of AI across sectors.
Although Hong Kong launch numbers are down year-on-year, those that are launching enjoy stronger backing, with plenty of large seed deals being arranged.
Recent notable launches include Balyasny vet Rob Tau’s Aeonea, which has over $1.5 billion in backing from Millennium; former Point72 Japan head Tomohiro Yamaguchi’s Invictus Investments, which has $200m in day-one SMA backing; and Hillhouse TMT vet Ken Lai’s Lean Arc Investment Management. Additionally, Hudson Bay, Centiva and Sona Asset Management have all opened Hong Kong offices in the past 12 months.
More broadly, Hong Kong has also seen a surge in licensed individuals carrying out regulated asset management activities, growing from 11,934 at the end of September 2020 to 14,430 at the end of September 2025. This is a vote of confidence in Hong Kong as a financial hub, supporting the retention and development of hedge funds in the region.
Singapore remains macro destination
Where Hong Kong is re-establishing itself as the equities hub, Singapore’s remains Asia’s home for macro, commodities and fixed income.
Sources fear that the Lion City may be losing some competitive edge as it continues to lose companies to foreign listings; however, strength across commodities and fixed income continues.
We are seeing this in upcoming launches: Qin Xiao, former co-head of commodities trading at Goldman, launching Nexus Commodities Capital Management with $1 billion of Millennium money on a non-exclusive basis, and former BlackRock Apac CIO Neeraj Seth expected to launch credit-focused 3R Capital with around $600 million.
Korea the new activist show in town
Seeders and other allocators are seeing an emerging opportunity set on the Asian activist front, particularly in Korea, where reforms are at an early stage. We have already seen Millennium’s first allocation to a Korean manager in the shape of a $250 million ticket for Seoul-based Billionfold, and investor interest in several other launches is strong.
Investors are understood to be attracted by the idea of getting in on the ground floor with new Korean managers amid the nascent corporate changes.
The growth of Japan activist and long/short strategies is also set to continue, with US pensions among those who are bullish on these strategies against a backdrop of strong equity markets and a more favorable political administration.
Sydney’s modest growth to remain muted
Australia’s hedge fund industry remains relatively modest, but it is showing signs of growth. Sydney continues to attract high quality global businesses – quant giant Qube opened an office last year, and GSA Capital made its first hires there in recent months.
Local observers point to a high level of talent coming from investment banks and universities, as well as Australia’s reputation for high living standards and quality of life as key reasons for growth. The allure of Down Under is tempered by fewer opportunities to secure capital from local institutions, many of which are viewed as being too tough on fees and keener on private markets strategies.
