The hedge fund trends for 2025 will be shaped largely by AI and its broader impact, as well as a prevailing sense of optimism amidst a seismic political shakeup, influencing investment decisions and how hedge fund managers themselves run their businesses.
Hedge funds have been on a wild ride the last few years, and the ride will continue with a whirlwind of technological, economic, and political change.
The reverberations will be felt throughout the world of investment management, and the way firms do things will have to change.
Check out below what's to come in the new year.
Like many others, hedge fund managers see the opportunity and value in AI investments.
One example is Steve Cohen, CEO of Point72 Asset Management, who plans to raise $1 billion to buy stocks in artificial intelligence companies.
A number of other hedge funds have poured money into AI stocks and private companies, looking for handsome returns.
For Cohen and again like many others, he expects AI to be “transformational” in the way firms do business, and everyone will win.
“There’s going to be big winners and big losers… When you have a technological change like this, it sort of reminds me of the ’90s where the best new companies came out of that period.”
And it’s not just about the AI itself, it’s also about investing in the infrastructure surround AI.
Learn more about the 10 best innovative stocks to invest in according to hedge funds.
While not a panacea for all hedge fund challenges, machine learning is getting smarter and smarter, and firms are embracing the technology.
86% of hedge fund managers now grant their staff access to various Gen AI tools in their work.
Information is everything in hedge fund management, and access to quality data helps fund managers make more informed decisions, a must in an industry where many funds fail to beat benchmarks.
With so much data, humans cannot manually go through it all effectively, and that’s where AI comes in, as one use case. The technology can sift through large volumes of data and organize in a way so much faster and for firms to create predictive models and analyze trends, then make better investment choices, hopefully to beat the market .
Your AI is only as good as the data that feeds it.
Hedge funds can do a lot with AI, but only with quality data.
Machine learning relies heavily on information fed into it, and if it’s receiving bad information, then the AI will produce the wrong results.
Without good data, AI-driven predictive models and analyses will deliver faulty analyses, resulting in bad trading decisions, further hurting many companies’ underperformance.
Additionally, the Regulatory Compliance Watch warns that Al systems can lead to “bias that harms some clients, prompt herd behavior that risks markets, invite bad actors to target Al systems in ways that could "l’create market instability,’ and result in some firms engaging in Al-washing.”
Now, this isn’t to dissuade the use of AI, but definitely be mindful of machine learning’s output.
And if it’s not just for using AI, some fund managers
There is so much data, almost too much, for anyone person or team to manual.
According to Business Insider, hedge funds are expected to “significantly increase” their budgets in 2025 for alternative datasets, which provide insights on data from sources including cell phone geolocation, credit card transactions, and satellite imagery.
Their report revealed that 95% of respondents expect their data budgets to grow or stay the same in 2025.
Meanwhile, more than 70% of data providers reported a rise in sales in 2024, with expectations of continued growth next year.
The reports also found that buyers work with 20 data vendors on average, spending $1.6 million annually — or ~$80,000 per dataset. Large, multi-strategy hedge funds, in comparison, spend a lot more, average of $5 million annually on data from ~43 vendors.
Given many hedge funds fail to beat the benchmarks, one can say there’s a shortage of top-tier fund managing talent.
That’s why hedge funds are willing to fork out a lot of money on PhDs, who are seen to complement the simultaneous push AI.
According to recruiters, PhDs are getting 50% higher compensation packages for quantitative roles at hedge funds compared with candidates holding other degrees.
Some of the more prominent and successful hedge funds like The Citadel, managing US $63 billion in assets, has 265 PhDs. London-based hedge fund Marshall Wace, with US $65 billion in assets, has approximately 50 PhDs, or 7% of its global workforce.
Sean Sweeney, director at Dublin-based employment agency CW Talent Solutions, shared his view on the value of PhD talent:
“Trading is becoming much more complex, so PhDs with deep expertise have an advantage over those with a typical Ivy League computer science degree.
Their advanced knowledge in areas like data analysis and quantitative modelling is increasingly valuable, giving them a strong edge in developing and implementing sophisticated trading strategies.”
A familiar face is returning to the White House, and Donald Trump’s impact will be felt far beyond the American capital.
And the impact on hedge funds is no exception.
An incoming Trump administration means a mix of ambitious and at times controversial policies and positions on taxes, (de)regulation, trade (including sanctions and tariffs), energy, environment, immigration, and foreign policy.
With every decision (and every tweet), the investment world will react.
And many of the below investment strategy changes and decisions can be attributed to the incoming Trump presidency.
Within a week of the election and Trump yet to formally assume office, the markets shot up to record highs, and hedge funds made some moves.
Banks, bonds, oil, and cryptocurrency are some of the notable moves and potential winners, with Bitcoin in particular already hitting new highs.
Trump’s victory has sparked a wave of “extreme” ESG selloffs by hedge funds, dampening prospects for sustainable investing.
ESG certainly has long-term staying power, as investors believe in the idea of sustainable investing. But in the current political and economic climate, ESG may not translate to the (more immediate) investment returns many are hoping for.
Also in that time, hedge funds that shorted Tesla have lost over $5 billion.
The next 4 years of a Trump presidency will definitely impact investors, and for a more detailed analysis on how various sectors will be affected, Wealth Professional offers a helpful guide.
Inflation has been a hot topic the last few years, and the Federal Reserve has aggressively raised rates in response.
High consumer prices notwithstanding, inflation rates have been on a downward trend since peaking in 2022.
And with Trump coming in, he is advocating lower interest rates.
While direct say over interest rates is a matter “largely out of his control”, experts say, Trump’s policies can have an indirect impact.
And one hedge fund executive, David Einhorn of Greenlight Capital, thinks higher inflation will be the result.
Citing tax cuts and immigration crackdowns, he believes this will pressure the labor market and wages, taking the consumer price index back into the 3% to 4.5% range, though far from the previous 7% to 9% highs.
As Einhorn stated:
"We have increased our bets on inflation. We will have another inflection up in inflation. The policy mix being proposed is inflationary and we will see more of that over the next few years."
The strategy of merger arbitrage hasn’t performed well for hedge funds in recent years, but with an incoming Trump administration, hedge funds are more optimistic about their prospects.
Anticipating a more favorable business and regulatory climate, hedge funds are looking at pursuing deals they otherwise haven’t done recently.
While hedge funds have long had an interest in the US and UK, other locations have risen in prominence, notably the UAE.
More and more of the world’s prominent funds are establishing a presence in the Gulf region, hoping to tap in on trillions of dollars of capital, as well benefit from a favorable tax and business environment.
Dubai is now home to four dozen $1+ billion hedge funds, and the industry now employs more than 1,000 people in the city.
The 2 and 20 model was once an industry standard, but those days are long gone for most firms.
The average fund today charges a management fee between 1.5% and 1.7%, with a 17% performance fee.
Still, some institutional investors are and demanding more changes to fees, especially in areas they see as “skill-less returns”.
In short, investors don’t want to be charged for incentive fees on returns that required little skill to achieve.
Of course, there are many skilled fund managers who can and do earn their rightful share of the gains, and those that do it best can charge higher fees, but it’s on hedge funds themselves to demonstrate that value clearly.
The rise of AI, including its benefits and pitfalls, have prompted regulators to take action.
In 2023, the SEC proposed new requirements, addressing conflicts of interest associated with use of predictive data analytics and similar technologies to interact with investors, in an effort to prevent firms from placing their interests ahead of investors’ interests.
Machine learning is already being used for compliance purposes, including analyzing consumer behavior, combating money-laundering, detecting fraud, and identifying changes to regulatory obligations, stress test models, and conducting risk management.
Still, Al is recognized for its inherent complexity and lack of explainability, which can frustrate and complicate compliance obligations, including the ability to provide adequate disclosures to clients.
AI is one piece of the puzzle, and more importantly, hedge funds need to think about digitally transforming their entire setup.
To stay competitive, hedge funds need to make full use of technology, optimizing efficiency in all processes, including (but not limited to):
Empaxis believes strongly in digital transformation for investment management, and we help hedge funds leverage best-in-class technology for the support they need.
As the hedge fund industry continues to grow, quality talent is needed not just in trading, investment research, or portfolio management.
Fund managers will also need experts in IT, operations, accounting, and compliance,
But recruiting, hiring, training, and managing that talent can be a real challenge and quite costly to take on in house.
Hedge funds can outsource those functions to a third party like Empaxis, which has the capabilities to support fund managers in:
According to speakers at a conference for HedgeweekLIVE North America, the COVID-19 lockdowns accelerated the trend toward outsourcing for hedge funds.
Alex Prylucki, managing partner for the investment advisory consulting firm LEVVR, pointed out that the benefits of outsourcing are a lot greater than any one single individual a firm can hire.
He also added that with outsourcing, firms can take advantage of time zones difference for outsourced activity. For example, US hedge funds can have trade reconciliations done overnight in Asia, which Empaxis can do.
Similarly, hybrid model outsourcing makes it possible to access talent not only offshore, but onshore.
If hedge funds require servicing done within their own country like the US, they can leverage Empaxis in that area as well, in partnership with MD Solutions.
The hedge fund outlook for 2025 shows promise, but it's in a state of flux, especially with a political shakeup in the US.
And from the rise of AI to increasing increasing demand for quality data, and from to the evolving regulatory landscape to new investment strategies, hedge fund managers must adapt and innovate to stay ahead.
By embracing technology, attracting top talent, operating most efficiently while navigating risks, hedge funds can position themselves for success in the new year and beyond.
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