Why Hedge Funds Missed 2025’s Top Stocks Despite Strong Returns

Hedge funds’ performance in 2025 has been a mixed story: while many have benefited from exposure to AI and Big Tech, a number of the year’s biggest winners came from sectors or names that were not on the radar of major funds—or were explicitly avoided. Institutional Investor reports that among the top performers through November, Western Digital rose ~261%, Robinhood ~233%, Seagate ~217%, Micron ~178%, Newmont ~138%, and Warner Bros. Discovery ~125% [1]. Yet, many of these names had minimal hedge fund backing. For example, Western Digital’s major shareholders include D.E. Shaw and Maple Rock, but no large hedge fund had a significant holding apart from those few. Robinhood was largely unowned, with Renaissance Technologies selling down ~82% of its stake in Q3 [1].

Such missed opportunities are partly explained by hedge funds clustering into familiar names—15–20 stocks tied to AI—while dismissing outliers that didn’t fit prevailing models, themes, or sector biases. Chips and storage (Western Digital, Micron, Seagate) gained from surging AI infrastructure demand and data storage needs [1]. Newmont, a gold mining company, also surged despite minimal hedge fund interest, hinting at capital flows driven by nontraditional signals such as macroeconomic hedges or inflation concerns [1].

Larger hedge funds may have been constrained by size, risk limits, or valuation concerns, prompting them to underweight off-the-run opportunities. For instance, Dana Shaw, Bridgewater, Coatue, etc. held positions in Palantir or Lam Research, which rose ~121% and ~114% respectively, but they missed or avoided stocks with leaps of 200–250%+ [1]. This behavior suggests a trade-off: upside limited by concentration in popular trades vs diversification potential in high-risk/high-reward names.

The broader hedge fund industry still posted decent aggregate returns. Goldman Sachs reported nearly 15% returns for global hedge funds through November, driven by stock-pickers and quant strategies, with healthcare and exposure to U.S. equities as notable contributors [2]. Small hedge funds—especially those managing under $100 million—performed better than large funds, returning ~14.6% vs ~10.8% for the broader hedge fund composite [3].

Strategic implications: The following areas merit attention:

• Portfolio Construction: Big hedge funds may revise models to better identify “underfollowed” names with structural tailwinds beyond AI themes.
• Risk Management: Avoiding crowded trades reduces crowding risk, but also risks missing explosive returns—hedging exposures across sectors remains critical.
• Smaller managers gaining alpha suggests potential for outperformance given flexibility; however, scalability and liquidity constraints remain limiting factors.
• Investor expectations: LPs may push for less herding and more diversified strategies to capture upside without oversized risk.
• Macro signals (inflation, AI resource demand, geopolitical shifts) appear to have greater influence than pure narrative-driven trends.

Open questions:

• Will the stocks missed by big funds continue to outperform, or will rotational pressure favor reigning AI big names going into 2026?
• How much did valuation discipline—e.g., concerns about AI overvaluation—cause funds to skip high-return names, and will that cost them more over time?
• What role will macroeconomic shocks (inflation, supply chain, trade) play in shifting capital flows toward or away from these surprise winners?
• Can smaller hedge funds scale their returns without triggering operational or liquidity constraints that come with size?