Hedge Funds Posted 10.7% in 2025—Can Strong Returns Hold Up Amid Rising Risks?

The hedge fund industry rode strong tailwinds in 2025, supported by sector rotations, elevated volatility, and investor optimism. Aggregate returns through November hovered around 10.7%, with total assets passing $5 trillion, and inflows neared $74 billion. Major strategies, particularly multi-strategy, global macro, and equity long/short, contributed to this strength. [1][2][3]

But beneath this surface triumph, recurring patterns are triggering concern. First, correlation risk is rising sharply: multi-strategy funds are showing their highest 12-month rolling correlation with the S&P 500 since 2011, reducing their diversification value. Event-driven strategies, hampered by low M&A and bankruptcy activity, have increased equity exposure instead of sitting on cash, amplifying vulnerability to a broad market sell-off. The rising AI FOMO has driven many portfolios toward AI-adjacent large-cap stocks, exacerbating concentration risk. [1]

Second, performance dispersion remains large. Smaller funds (under $100 million) outperformed larger peers—14.6% vs industry averages—due to agility, niche focus, and lower capacity constraints. But for large multi-strategy platforms, the pressure is on: high operating costs, talent competition, and steep investor expectations are squeezing margins. Fee structures and liquidity terms are under increasing scrutiny. [2][3][6]

Third, macro headwinds are real: stretched valuations in equities, tight credit spreads, shifting rate expectations, geopolitical uncertainties, and potential inflation pressures pose risk to performance. Structured credit, market-neutral equity, and event-driven strategies have been downgraded or flagged as vulnerable by industry observers. [5][6]

Strategic implications for allocators and managers alike include the need for deeper stress testing of portfolios under turbulence, revisiting the role of large platforms versus nimble managers, demanding greater transparency and risk control, assessing fee-vs-net return trade-offs, and keeping allocations flexible. Open questions remain around timing of central bank policy shifts, whether inflation or default risks will surge, and whether the AI-led rally has created a bubble that could burst sharply.