AI Adoption Surges as Hedge Funds Pivot to Multi-Strategy and Credit Growth for 2025 Rebound

AI Adoption at 86% Drives Hedge Fund Shift Toward Multi-Strategy and Credit Growth

The hedge fund industry is set for a strong rebound in 2025, fueled by lower interest rates, improved investor confidence, and the increasing integration of artificial intelligence (AI) into investment strategies. A recent report by IG Prime highlights that these factors are renewing interest in hedge funds, with new fund launches on the rise and assets under management reaching record levels.

Global Overview and Outlook

During 2024, hedge funds faced challenges such as rising operational costs, regulatory pressures, and uneven returns. However, the Federal Reserve’s 50 basis point rate cut shifted the playing field. Lower interest rates create a more favorable environment for hedge funds to outperform safer asset classes.

Heightened market volatility, driven by geopolitical tensions and economic uncertainty, opened more opportunities for profit. The election of Donald Trump as U.S. president in November 2024 further boosted optimism. His administration is expected to implement policies favorable to hedge funds. The appointment of Treasury Secretary Scott Bessent, a seasoned hedge fund professional, signals potential regulatory easing—a move that may influence other regions competing for capital.

AI Integration in Hedge Funds

AI is now a core component in hedge fund operations, with 86% of managers adopting generative AI tools. These technologies aid in data processing, predictive analytics, algorithmic trading, and fraud detection. Surveys reveal that 64% of fund managers believe AI has the greatest impact on forecasting, while 52% value its data analysis capabilities.

Despite the enthusiasm, AI’s track record in consistently delivering excess returns remains uncertain. The Eurekahedge AI Hedge Fund Index has recently lagged behind the S&P 500. Questions persist about whether the benefits justify the costs. Regulators are cautious about AI’s potential to increase risks like market manipulation and herd behavior. Still, AI’s value in enhancing operations, risk management, and client service is clear.

Performance and Preferred Strategies

Performance across hedge funds in 2024 was mixed. Macro funds struggled, while multi-strategy and systematic funds showed strength. Long equity strategies benefited from gains in global markets, notably U.S. technology stocks. Event-driven funds also profited from increased merger and acquisition activity.

Looking ahead, multi-strategy funds remain the top choice, followed by emerging market and equity long/short funds. Credit strategies, particularly private credit, continue to draw attention due to their resilience in volatile environments.

Fee Trends and Investor Expectations

Investor preferences are shifting toward lower fees and a closer link between fees and fund performance. The classic “2-and-20” fee structure is becoming less common. Current averages hover around 1.35% for management fees and 16% for performance fees.

More funds are adopting “cash hurdles,” which means performance fees are charged only when returns exceed the risk-free rate. This change reflects growing investor dissatisfaction with high fees paired with average returns.

Private Markets and Digital Assets

Private markets remain attractive, with private equity and credit leading growth. Private credit assets exceeded $3 trillion in 2024, supported by tighter banking regulations and a search for higher yields.

Digital assets are gaining traction as well, with 47% of hedge funds holding cryptocurrency exposure. The approval of Bitcoin and Ethereum ETFs along with clearer regulatory guidelines have boosted confidence in this area.

Outlook for 2025

The hedge fund industry is positioned for growth in 2025, supported by lower interest rates, advances in technology, and a more favorable regulatory climate. Multi-strategy and credit funds are expected to deliver strong performance. AI and private markets will remain key growth segments.

Smaller funds may face challenges competing against larger firms, potentially leading to increased consolidation in the sector.

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