Hedge funds back in favor, but allocations may be ‘constrained’ — Goldman Sachs

After years of being out of favor, hedge funds seem to be back.

Hedge funds were at the top of allocators’ lists as the most sought-after asset class heading into this year with 37% reporting they plan to increase their exposure, according to the recently released Goldman Sachs’ prime services hedge fund 2025 outlook.

The report surveyed 358 allocator firms globally as well as 275 hedge fund managers that are clients of Goldman Sachs’ prime services business. The report noted that the allocators who responded may be more “positively engaged with their hedge fund portfolios than the global investor base at large."

Ninety-one percent of allocators surveyed said their hedge fund portfolio had delivered either in line with or beaten expectations — the highest ever indicated since 2017 when the survey began.

The results come after the hedge fund industry on average delivered double digit returns in 2024.

Private credit was the second most sought after asset class with 31% of allocators saying they plan to increase their exposure followed by active long only equities at 30%, according to the survey.

Private banks led the allocator charge with the strongest conviction in hedge funds with two-thirds indicating they planned to increase exposure this year.

But the industry still faces plenty of challenges ahead.

Nearly half of survey respondents said cash would be the likely funding source of hedge fund allocations. The Goldman Sachs report noted, “we do not believe that cash balances in portfolios are particularly high, which may suggest that the absolute level of increased allocation to hedge funds may be constrained.”

And while allocators report they may increase hedge fund allocations, the industry still saw net outflows in 2024. Goldman Sachs reported that it estimates that only a quarter of managers achieved net inflows of greater than $100 million during 2024.”

When it comes to pension funds, the report found that for the sixth consecutive year, pension funds have seen their share of the hedge fund industry asset base recede.

Other trends including separately managed accounts and cash hurdles are continuing to gain ground in the industry.

Nearly 60% of hedge fund managers are now offering separately managed accounts with 8% of managers launching their first SMA in 2024, according to Goldman Sachs data.

Goldman Sachs estimates that SMA capital reached a peak of $315 billion at the end of 2024 and that SMAs now account for over 7% of the industry’s assets. And 19% of allocators are using SMAs in some capacity with public pension funds and sovereign wealth funds among the highest adopters.

Hedge fund management fees have trended higher in recent years with Goldman Sachs reporting that management fees averaged 1.77% while performance fees averaged 17.3% in 2024.

But a large caveat to the data comes from allocators paying pass-through fees in which fund expenses are passed on to investors. The average pass-through fee was 4%, in addition to regular fees, in 2024, Goldman Sachs reported.

The ever-present discussion around hedge fund fees show no sign abating. Cash hurdles have gained ground with almost half of allocators actively seeking this structure and 30% of managers now saying they offer the structure.