In-Depth Analysis of Hedge Fund Industry Performance and Investment Implications

Based on the latest research data and industry reports, I will provide you with an in-depth analysis report on the hedge fund industry.

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The hedge fund industry achieved an approximate 12.6% return in 2023, marking its best performance since 2009 [1]. This momentum continued in 2024, with the industry’s overall return reaching 10.1%, including 2.1% in alpha (excess return), the second-highest annual return in the past decade [2]. As of the end of September 2025, the global hedge fund industry has reached a size of $4.98 trillion [3].

Institution	Fund Name	Return Rate	Remarks
Bridgewater Associates	Pure Alpha II	34%	Record high in the fund’s history
Bridgewater Associates	All Weather	20%	Flagship strategy fund
Bridgewater Asia	-	37%	Among top global hedge funds
D.E. Shaw	Oculus	28.2%	Maintained zero negative returns since 2004
D.E. Shaw	Composite	18.5%	Flagship multi-strategy fund
Melqart Opportunities	Event-Driven Strategy	45.1%	Annual return champion
Millennium Management	Multi-Strategy	10.5%	Outperformed Citadel for the first time since 2020
Citadel	Wellington	10.2%	Leading multi-strategy fund

Data sources: Cailian News, Whalesbook, etc. [4][5]

The 2025 returns of hedge funds were primarily driven by two key strategies [3]:

• Long/Short Equity Strategy
  : Generates excess returns through stock selection
• Global Macro Strategy
  : Trades based on macroeconomic themes across equities, bonds, commodities, and currencies

Both strategies posted gains of over 17%. Additionally, the December rally was led by macro commodity, trend-following, and energy fund strategies.

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Hedge funds employ diversified investment strategies, primarily including the following categories:

• Captures relative returns by going long undervalued stocks and shorting overvalued stocks
• Performs particularly well when market dispersion increases
• In 2025, strategies employing market-neutral positions delivered the most standout performance

• Makes investments based on judgments of global economic trends
• Covers macro variables such as interest rates, exchange rates, and inflation expectations
• Bridgewater’s Pure Alpha II is a model of this strategy

• Focuses on special events such as corporate mergers, reorganizations, and bankruptcies
• Melqart Fund’s 45.1% return demonstrates the strategy’s advantages during periods of policy volatility

• Seeks pricing discrepancies between related assets
• Includes convertible bond arbitrage, fixed-income arbitrage, etc.

• Utilizes multiple strategies simultaneously to diversify risk
• Adopted by firms like Millennium Management and Citadel

The performance of different strategies varies significantly across different market environments:

Market Environment	Most Suitable Strategy	Performance Characteristics
High Volatility Market	Macro Strategy, CTA	Enhanced trend-tracking capability
Low Volatility Market	Long/Short Equity, Market Neutral	Returns determined by stock selection ability
Period of Policy Changes	Event-Driven, Macro	Captures arbitrage opportunities
Liquidity Crisis	Relative Value	Increased pricing discrepancy opportunities

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• Increased geopolitical uncertainty has led to market volatility, highlighting the advantages of active management by hedge funds [6]
• Shifts in Federal Reserve interest rate policy have created trading opportunities for macro strategies amid bond market volatility
• Fluctuations in exchange rates and commodity prices triggered by changes in trade policies also facilitate strategy execution

• AI themes are concentrated in specific tech stocks, and macroeconomic conditions driven by trade war expectations have created significant arbitrage opportunities in currency and bond pricing [7]
• Increased dispersion provides more opportunities for stock-picking funds to capture alpha

• According to a Barclays survey, among over 300 investors managing $8 trillion in assets, 36% plan to increase their hedge fund allocations in 2025 [2]
• Pension funds and insurance companies plan to raise their allocations from 9% to 19% (net growth)
• University endowments and sovereign wealth funds plan to increase allocations from +21% to +25%

• Bridgewater Associates has adopted artificial intelligence and deep learning technologies in its investments [8]
• Quantitative technologies are increasingly being applied in information processing and strategy execution

• As more capital flows into high-return strategies, arbitrage opportunities may be rapidly exhausted
• Systematic macro strategies faced difficult times in 2025, suffering significant losses during “Liberation Day” [9]

• The high-fee model of traditional hedge funds (2% management fee + 20% performance fee) continues to face scrutiny from investors
• Investors are increasingly willing to pay a premium for funds that can deliver alpha and non-correlated returns [10]

• Some hedge funds are tightening liquidity terms in response to market changes
• Investors need to pay attention to redemption restrictions and lock-up period arrangements

• Compensation competition for top fund managers has become increasingly fierce
• Talent mobility may impact the continuity of fund performance

Based on a comprehensive analysis, we hold a

view on the sustainability of hedge fund performance:

• Volatility is expected to remain elevated, favoring active management strategies
• Approximately 60% of allocators plan to increase hedge fund allocations
• Statistical arbitrage and multi-manager funds are the most favored sub-strategies among investors

• Strategy performance may diverge, with top-tier institutions continuing to outperform the market
• Weaker players will face greater capital and performance pressure
• Industry consolidation may accelerate

• Hedge funds will continue to exist as an important component of asset allocation
• However, continuous innovation is required to justify their high fees

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Historical data shows that the performance of active management and passive investing has distinct cyclical characteristics [11]:

• Bull Market Environment
  : Passive investing typically performs better, as the overall market rises, and investors can gain returns by following the index
• Bear Market/Volatile Market
  : Active management may outperform the index through position control and stock selection ability
• Market Correction Periods
  : There have been 28 market corrections over the past 35 years, with active management outperforming passive investing in 22 of them

In an environment of rising market dispersion, in-depth research capabilities become more important:

• Active equity funds have an advantage in capturing mid-cap stock opportunities
• For small and mid-cap stocks with lower pricing efficiency, it is easier for active management to generate excess returns
• Professional research in sectors such as healthcare, technology, and convertible arbitrage can create value

The long/short strategies of hedge funds provide insights for traditional stock picking:

• Shorting overvalued targets can hedge part of market risk
• Short-selling analysis (short candidates) can also improve overall portfolio quality

• Active management can flexibly adjust positions based on changes in market style
• When sector rotation is fast, active funds can more easily capture opportunities

Advantages	Limitations
Low fees	Cannot avoid systemic risk
High liquidity	May hold overvalued constituent stocks
Transparent and simple	Cannot protect against downside risk during market declines
Tax-efficient	Prone to synchronized rises and falls, reducing pricing efficiency

• Passive investing based on factor strategies (dividend, low volatility, quality, momentum, etc.) provides an alternative between active and passive investing
• These strategies can systematically capture specific risk premiums at low cost

A core-satellite allocation model adopted by many successful investors:

• Core Component (70-80%)
  : Index funds to capture average market returns
• Satellite Component (20-30%)
  : Active management funds or hedge funds to pursue excess returns

According to research from Orient Securities [12], the A-Share market exhibits the following characteristics:

• The proportion of passive investing has risen rapidly since 2022, now exceeding 50%
• The rise in passive investing is driven by improved market efficiency
• Large-cap stocks have high pricing efficiency, so ETF allocation is recommended
• Mid-cap stocks have lower pricing efficiency, making them more favorable for active management
• For small-cap stocks, quantitative strategies can be selected for investment

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• Use hedge funds as a diversification tool in investment portfolios
• Recommended allocation ratio: 5%-15% (adjust based on risk preference)
• Prioritize top-tier institutions with long-term performance records

• Do not over-concentrate on a single strategy
• Recommended portfolio allocation: Long/Short Equity (30%), Macro Strategy (25%), Event-Driven (20%), Relative Value (15%), Other (10%)

• Pay attention to the liquidity terms of funds
• Maintain a certain level of liquidity to respond to market changes

• Investors with less investment experience should prioritize index funds
• Investors with some experience can moderately participate in active management

• Long-term investment (20-30 year retirement planning): Index funds may provide sufficient returns
• Short-term investment: Active management may deliver better risk-adjusted returns

• Investors with lower risk tolerance: Allocate more to fixed income and low-volatility strategies
• Investors with higher risk tolerance: Can increase hedge fund allocations

• Bridgewater’s AI-driven new fund AIA Macro has raised over $5 billion [8]
• The application of artificial intelligence in fundamental analysis and quantitative strategies will continue to deepen

• 55% of traditional hedge funds held digital assets in 2025, up from 47% in 2024 [13]
• The weight of ESG factors in investment decisions is increasing

• Asian markets (especially China and India) are receiving more attention
• Latin America is favored by hedge funds due to the “Tang-Luo Trade” theme [14]

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1. Performance Sustainability
   : The outstanding performance of hedge funds from 2023-2025 has a certain degree of sustainability, but risks such as strategy crowding and fee pressure need to be noted. In the short term (2026), with market volatility remaining elevated, the advantages of active management are expected to continue.

2. Strategy Adaptability
   : Different strategies perform differently in different market environments, and investors should select appropriate strategy allocations based on macroeconomic forecasts. Global macro and long/short equity strategies are the most attractive in the current environment.

3. Complementarity of Active and Passive Investing
   : The performance rebound of hedge funds provides important insights for traditional stock picking and index investing. The two are not opposing but complementary tools. Investors should flexibly allocate based on market environment, personal risk preference, and investment horizon.

4. Industry Evolution
   : The hedge fund industry is undergoing profound changes, including technology empowerment, fee structure restructuring, and strategy innovation. Institutions that can adapt to changes and continuously create alpha will gain greater development space.

The size of the hedge fund industry is projected to grow from approximately $5 trillion in 2024 to $6.2 trillion by 2030 [15]. During this growth process, the industry will exhibit the following trends:

• Headwinds Concentration
  : Top-tier multi-strategy institutions will continue to dominate the market
• In-Depth Technology Integration
  : AI and machine learning will be more widely applied in investment decision-making
• Fee Structure Transformation
  : Performance-oriented fee models will become more prevalent
• Strategy Diversification
  : New strategies and asset classes will continue to emerge

For investors, understanding the strategy logic and performance drivers of hedge funds will help better utilize this tool in asset allocation to achieve the goals of risk diversification and return enhancement.

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[1] Investopedia - “Hedge Fund Industry Posts Best Performance Since 2009” (https://cn.investing.com/news/stock-market-news/article-3162584)

[2] Barclays Investment Bank - “2025 Hedge Fund Outlook: Allocations set to grow in 2025” (https://www.ib.barclays/our-insights/3-point-perspective/2025-hedge-fund-outlook.html)

[3] HFR/Hedge Fund Research - 2025 Hedge Fund Industry Performance Data

[4] Cailian News - “Global Top-Tier Hedge Fund 2025 Return Rankings Released” (https://finance.eastmoney.com/a/202601033607653166.html)

[5] Whalesbook - “Hedge Funds Hit Record Highs in 2025” (https://www.whalesbook.com/news/69083793063c3cf834b9d9fc/)

[6] Franklin Templeton - “Hedge Fund Strategy Outlook: Third quarter 2025” (https://www.franklintempleton.com/articles/2025/alternatives/hedge-fund-strategy-outlook-third-quarter-2025)

[7] Yahoo Finance - “Global Hedge Funds Post Strongest Performance in Over Five Years in 2025” (https://tw.stock.yahoo.com/news/)

[8] Securities Times - “Bridgewater, the World’s Largest Hedge Fund, Adopts AI for Investments” (https://www.stcn.com/article/detail/1177395.html)

[9] Man Group - “Q4 2025: Don’t Stop Believin’?” (https://www.man.com/insights/Q4-2025-Hedge-Fund-Strategy-Outlook)

[10] With Intelligence - “Hedge Fund Outlook 2025” (https://www.withintelligence.com/insights/hedge-fund-outlook-2025/)

[11] Hartford Funds - “The Cyclical Nature of Active & Passive Investing” (https://www.hartfordfunds.com/insights/market-perspectives/equity/cyclical-nature-active-passive-investing.html)

[12] Orient Securities - “Mid-Cap Blue Chips Emerge, Advantages of Active Equity Funds Highlighted” (https://pdf.dfcfw.com/pdf/H301_AP202601071816508649_1.pdf)

[13] LinkedIn - “Bridgewater’s Pure Alpha Fund Projected to Surge 33% in 2025” (https://www.linkedin.com/posts/mark-wang-b965a9229_bridgewater-associates-flagship-fund-pure-activity-7413646977504112642-ZGs0)

[14] Storm Media Group - “Trump Intervention Creates Opportunities? Hedge Funds Rush into Latin America to Position for the ‘Tang-Luo Doctrine’ Trade” (https://www.storm.mg)

[15] Global Market Insights - “Hedge Fund Market Size & Share Analysis” (https://www.gminsights.com/)