Investors demand the expertise of alternative management and flexibility in listed index funds.
The year 2024 was remarkable for the hedge fund and ETF industries, both in terms of fresh money inflows and performance. In 2025, these two asset classes could also benefit from strong demand, driven by the desire to protect against a potential market reversal and/or take advantage of price anomalies that may arise within a new framework of international relations. Hedge funds indeed offer access to innovative investment strategies, while ETFs are increasingly designed to meet investment objectives previously reserved for hedge funds – and at very low costs.
Funds positioned for the unknown
On the hedge fund front, let's recall that investors injected more than $400 billion into hedge funds in 2024, according to figures from Hedge Fund Research (HFR). This brings the total capital managed by this industry to over $4.5 trillion (end of December 2024). Most of these investors were not disappointed. The overall funds, measured by the HFRI Fund Weighted Composite Index, increased by 9.8% last year.
"Institutional investors are likely to increase their allocations to hedge funds, which have demonstrated the robustness of their strategies during the volatile year that was 2024 and are tactically positioned for the diverse and unpredictable impacts of rapidly evolving policy changes in 2025," predicts Kenneth J. Heinz, president of Hedge Fund Research (HFR), in a recent market report.
Apart from cryptocurrency-based strategies, the strategies that performed best in 2024 and early this year are directional strategies. In other words, trend following and momentum. Morgan Stanley defines momentum as the quintile of stocks with the highest risk-adjusted returns over 12 months compared to the quintile with the lowest returns. These strategies recorded a gain of 12% in 2024 and 1.68% in January 2025, according to HFR data.
These returns are largely explained by their long positions in major US technology stocks. Although their growth prospects and profit margins remain solid and their valuations are not comparable to those of the internet bubble of the 2000s, the sector poses a concentration risk. In other words, the risk that high returns are excessively dependent on a very limited number of stocks composing the US market.
Momentum facing concentration risk
These questions may suggest that some heavily undervalued stocks could regain favor with investors seeking diversification and/or superior future returns. Thus, the segment of activist funds within event-driven strategies recorded a 2.4% increase in January. Similarly, event-driven arbitrage in the credit market rose by 1.95% over the same period, outperforming both directional strategies.
More broadly, event-driven funds seek to profit from events occurring within companies (M&A, bankruptcies, restructurings...) that may create price dislocations and opportunities for the most competent managers. "Alternative managers navigated a volatile January in the technology sector, with earnings, capital expenditures, and strategic outlooks impacted by intense competition in the AI field led by the Chinese startup DeepSeek," commented Kenneth J. Heinz.
On the ETF side, let's first note that the industry recorded a net inflow of $1.88 trillion in 2024 globally, bringing total assets to $14.85 trillion. Although the 20 largest ETFs capture the majority of capital, innovation aimed at meeting increasingly sophisticated needs remains particularly dynamic.
Finance professors at George Mason University also note that turning points coincide with moments when "uncertainty of uncertainty" is high. In French, this corresponds to a situation where the market is unable to accurately assess what is happening or when a trend is coming to an end.
"Overall, instruments that track volatility of volatility (VVIX index) or volatility itself (VIX index) can be useful in identifying market reversals. The standard idea that exuberance is the main indicator of market dynamics seems to hold true," write Derek Horstmeyer, Ruben Devia, and David Peters, professors at George Mason University, in a study published in February 2025.
