Hedge funds thrived in an uncertain macroeconomic environment throughout a 2024 littered with general elections, geopolitical volatility, and pioneering tech innovations. Now, as we enter a 2025 set to be punctuated by the second term of Donald Trump, what lies ahead for US institutions?
According to hedge fund research firm PivotalPath, firms in 2024 averaged returns of 10.7% throughout the year through November, as opposed to 5.7% for the same period in 2023, indicating that last year was a strong one for hedge funds.
Although the resounding US Presidential election victory for Donald Trump brought an initial wave of optimism for the 2025 economic outlook, a clouded outlook appears to be taking hold for US markets as uncertainty over what Trump 2.0 looks like impacts trading strategies.
Although the potential for deregulation and corporate tax reform will be music to the ears of institutional investors, Morgan Stanley anticipates clear winners and losers to emerge from the Trump administration’s policies.
As a result, the investment bank has suggested that it will favor more specialist equity and credit managers to analyze and monetize alpha opportunities alongside a relative value, low-net, or market-neutral approach with minimal beta.
Despite a clear wariness among investment banks, it’s clear that higher volatility and uncertainty can drive new opportunities for hedge funds. But what should fund managers be on the lookout for in a 2025 that’s likely to feature fresh opportunities and risks?
The Certainty of Uncertainty
The economic outlook under Donald Trump will be a major source of unpredictability in 2025. Ranging from fiscal policy to the use of tariffs as a key bargaining chip in international negotiations, the President will loom large over Wall Street throughout his second term.
Trump’s influence over central bank policy and the ever-changing geopolitical landscape will also contribute heavily to the volatility forecasted for 2025.
Additionally, the S&P 500 has recorded back-to-back years exceeding 25% gains in total return terms, driven by a relatively small collective of tech-focused stocks. As we saw with the recent concern over China’s launch of rival AI platform DeepSeek, the assumed market dominance of leading US tech players isn’t unshakeable.
Stubborn inflation is also forecasted to extend into 2025, with the Federal Reserve suggesting that only two rate cuts are likely to happen throughout the year ahead.
Abrdn Investments has attempted to quantify these economic factors in its forecasts for the year ahead. In the base case, with a 60% probability, the investment firm anticipates steady US growth while Europe and Asia are moderate. Sticky inflation lingers, and a positive outlook for risk assets emerges with equity markets continuing to rise.
The more bullish case, which Abrdn allocates a 15% probability, will see significant policy easing in China paving the way for more robust global growth without inflation ramping higher. This would aid central banks in easing monetary policy, providing a significant boost for risk assets while equity markets rally over 10%.
The bearish case, which has a 25% probability, will see a recession in the Eurozone and UK, escalating geopolitical conflicts, and a US recession triggered by Trump’s handling of the economy prompting sharp Fed rate cuts. This would see a 10% decline in global equities and a weaker outlook for risk assets.
Navigating Volatility
Periods of increased volatility are usually filled with opportunities for hedge funds, and skilled managers will be looking to generate alpha in 2025 by taking advantage of price movements through security selection.
Institutions looking to deploy long volatility strategies may benefit from the help of a globally-focused prime brokerage for hedge funds. However, hedge funds could also experience more downward pressure on equity and fixed-income valuations due to higher instances of volatility. It’s for this reason that it could be worth institutional investors seeking higher returns to compensate for heightened levels of risk.
Global ESG Divergence
The year ahead will also see further challenges for ESG investing. While environmental, social, and governance stocks had drawn widespread institutional interest just a few years ago, many hedge funds had hesitated to allocate funds to ESG strategies due to their complexity and lack of clarity regarding tangible benefits.
Notably, firms like Tesla have received a lower ESG score than some oil companies, drawing skepticism over the accuracy of the initiative.
The arrival of Trump, who has already pledged expedited approvals and permits, including all environmental approvals, to anyone investing $1 billion into the US, is expected to diminish ESG investing further in the US. However, hedge funds could still find value across European and Asian markets.
Uneven Regional Growth Ahead
The uncertain economic climate appears set to extend beyond the US and Europe, with many fresh investment opportunities and risks across Asian and emerging markets in 2025.
This year could see the recovery of Hong Kong following years in the wilderness in the wake of the pandemic and geopolitical uncertainty with China.
With China attempting to provide stimulus for economic growth, various tax breaks have been introduced to attract asset managers which could see Hong Kong once again become a lucrative hub for hedge funds.
China’s latest foray into the artificial intelligence boom in the launch of DeepSeek has rocked US markets and could be a catalyst for further growth among Asian economies.
The Middle East may also benefit from improved access to capital pools. With more than one-quarter of the world’s top 100 hedge funds now building a presence in the UAE, a clearing geopolitical landscape may help to foster a more internationally-focused strategy for institutions this year.
Opportunities and Risks
The year ahead is set to bring a high level of volatility that will see more hedge funds benefit from calculated risk-taking over the months ahead.
Although the geopolitical landscape remains uncertain, more conservative estimates suggest a continuation of global growth which could see more funds benefit from a global focus within their 2025 strategies.
With the return of Donald Trump, hedge funds will have a platform to increase their alpha through unexpected market movements. The likelihood of volatility will benefit agile institutions in the year ahead, helping to drive profitability higher with healthy levels of risk management.
Brief: This article will explore whether investors should expect a strong 2025. We’ll talk about Trump’s presidency, changes to trade policies, Elon Musk’s involvement, and more.
