Insights
2025 Hedge Fund Outlook: Rapidly Changing Global Macroeconomic Environment May Boost Hedge Funds
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2025 Outlooks
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December 20, 2024
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2025 Hedge Fund Outlook: Rapidly Changing Global Macroeconomic Environment May Boost Hedge Funds
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December 20, 2024
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2025 Hedge Fund Outlook: Rapidly Changing Global Macroeconomic Environment May Boost Hedge Funds
2025 Hedge Fund Outlook: Rapidly Changing Global Macroeconomic Environment May Boost Hedge Funds |
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| 1 | The U.S. presidential election has ushered in an era of U.S. Exceptionalism, which we expect to remain a theme in 2025. However, we are cautious that recent speculative behavior could portend a market top. |
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| 2 | We emphasize the need for specialist portfolio managers who we believe are best positioned to analyze policy impacts on security prices and capture the potential opportunity in increased capital markets activity. |
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| 3 | We believe that hedge funds continue to serve a critical role in portfolios, with their ability to capitalize on a rapidly changing environment while delivering a source of uncorrelated return and diversification within portfolios. |
What we’re seeing
Markets have remained remarkably resilient, particularly in the U.S., with greater stock market outperformance than most major developed markets, strong credit market returns and a surging dollar. The presidential election seems to have ushered in a new wave of U.S. Exceptionalism, which we expect to remain a theme in 2025, as artificial intelligence (AI) fervor has not abated, monetary policy easing has begun, and the incoming administration has expressed a penchant for deregulation. Market consensus suggests high conviction in another strong year for U.S. equities. But we question whether recent increases in speculative and risk-on behavior, driven by low levels of market volatility and evidenced by frothy equity valuations and chart-topping digital asset prices, may portend a market top, particularly if the sheen begins to wear off of the U.S. market.
We continue to believe that hedge funds will play a critical role in investor portfolios in 2025, seeking to capitalize on what we expect to be a year of alpha winners and losers determined by policy proposals and enactments, while also offering a robust source of diversification should cracks in the markets’ relatively calm façade begin to show.
What we’re doing
While the potential for de-regulation and corporate tax reform may appear broadly constructive for U.S. equities, we expect clear winners and losers to emerge from policies proposed by the Trump administration. We prefer specialist equity and credit managers who are most capable to analyze and monetize these alpha opportunities and prefer a relative value, low-net or market neutral approach with minimal beta.
Global mergers and acquisition (M&A) and equity capital markets (ECM) activity remains relatively low, but 2025 could bring a revival in deal activity, and the prospect of less regulatory scrutiny may improve the opportunity set for both equity and credit event driven strategies. Non-U.S. markets have been at a disadvantage given the dominance of U.S. tech, but certain regions, such as the Eurozone and Japan, with ample price dispersion could present opportunity.
We stress the need to incorporate highly liquid, responsive, macro convexity strategies within portfolios to capitalize on price volatility if consensus views prove incorrect, stoking periods of broader market volatility.
What we’re watching
The record number of global elections were a pervasive source of uncertainty which has now been resolved, but the work of governing has the potential to bring cascading impacts across economies and markets. We’ll be closely watching the incoming administration’s first 100 days in office to determine where and how policy implementation may differ from current expectations, and the resultant impacts across financial markets.
Progress on inflation has slowed, and the likelihood of tariffs has potential to reignite pricing pressures next year, casting doubt over the ultimate path of rates and monetary policy. The reaction by the rest of the world, particularly China, to tariffs and heightened protectionism bear close monitoring as well. We believe that hedge funds are poised to capitalize on what could be a rapidly changing environment, while delivering a source of uncorrelated return and diversification within portfolios.
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Chief Investment Officer and Head of the AIP Hedge Fund Team
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Deputy Chief Investment Officer of the AIP Hedge Fund Team
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“The record number of global elections were a pervasive source of uncertainty which has now been resolved, but the work of governing has the potential to bring cascading impacts across economies and markets.”