Hedge Funds Shift Focus to Alternative Strategies Amid Volatile Markets

Hedge fund investors are increasingly turning away from traditional investment strategies that depend on broad market movements to generate returns, opting instead for alternative approaches in response to expectations of turbulent markets in 2025. This shift is highlighted in a report by Reuters, which cites a recent survey from Barclays released on Tuesday.

The survey, which questioned 325 hedge fund investors managing nearly $9 trillion in assets, reveals a rising preference for strategies that minimize market “beta” exposure—essentially the degree to which hedge fund returns are linked to broader market trends. Investors are now urging hedge funds to reduce their reliance on beta-driven strategies, targeting exposure between 5% and 15%, with some even advocating for complete independence from market fluctuations.

This growing demand for alternative strategies follows notable losses in the hedge fund sector during the recent sell-off of technology stocks on January 29, triggered by the introduction of DeepSeek, a low-cost artificial intelligence model from China. Although hedge fund exposure to tech stocks had already decreased since its 2023 peak, allocations to this sector remained relatively high compared to pre-pandemic levels.

According to Roark Stahler, Barclays’ head of strategic consulting for the Americas, hedge funds currently maintain an average beta of just over 20%. Additionally, uncertainty surrounding the policies of the new U.S. administration has led investors to favor hedge fund strategies that can capitalize on market volatility, as observed by Jon Caplis, CEO of the research firm PivotalPath. Caplis pointed out that equity valuations have significantly increased, with the S&P 500 showing an annualized growth rate of 14.5% since 2020, which some believe may be unsustainable.

Traditional hedge fund approaches, such as long-short stock picking, credit-focused strategies, and activism, have lost favor with investors. Instead, there is a rising interest in funds that leverage algorithms to exploit price differences in stocks and assets affected by mergers and acquisitions, as noted in Barclays’ report.

Among the various options available, multi-manager hedge funds—those that combine multiple trading strategies under one umbrella—have become the most popular among investors. These funds accounted for 56% of investor allocations in 2024, a notable increase from the previous year, when they held less than half of total investments.

The data also reflects the growing dominance of the largest hedge funds. Over the past decade, the average hedge fund in the top 20 has expanded its assets by nearly 50%, with assets under management rising from $34 billion in 2014 to about $50 billion today. In contrast, smaller and mid-sized hedge funds have experienced more modest growth, adding only $1 billion in assets over the same period. This shift underscores the increasing concentration of wealth within a select group of larger hedge funds.