The Year That Hedge Funds Got Their Mojo Back

Caitlin McCabe

Sat, Jan 18, 2025, 3:30 AM 5 min read

Hedge funds’ strong showing in 2024 was aided by a bumper year for stocks. - timothy a. clary/Agence France-Presse/Getty Images

Hedge funds are having a moment. Will it last?

In a year when everything seemed to go up, the industry generated some of its strongest, and most consistent, returns in a decade. The big question for investors: Was 2024 a turning point, or will the recent trend of so-so—and sometimes dismal—returns quickly reassert itself?

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On average, hedge funds gained 10.7% after fees last year, according to an index from PivotalPath tracking more than 1,100 funds. That was the best year since 2020, when they made 11.4% amid pandemic-fueled volatility. Before that, the last time the industry saw double-digit gains was 2013.

Every strategy tracked by the research firm made money on average—unusual in an industry where multiple strategies typically falter in any given year.

“Last year was probably one of the best years in a long time for hedge funds,” said Caron Bastianpillai, a senior portfolio manager at NS Partners, a Geneva-based investment-management firm that allocates money to hedge funds. “Everything has been working. It’s rare that you find that.”

Among numerous big winners were Castle Hook Partners in New York, a specialist in macro investing; Florida-based Infinitum Partners, which focuses on technology stocks; and Helikon Investments in London, whose big investments included backing one of Greece’s banks. All three firms returned more than 60% after fees.

It is a welcome showing for an industry that has faced growing competition for investor dollars from areas such as private credit, plus criticism for charging high fees while often delivering middling returns. Even with last year’s strong outturn, the hedge-fund industry still delivered less than half of the S&P 500’s 25% total return, including dividends.

Hedge-fund firms say they aren’t simply trying to beat indexes. Instead, they focus on making money no matter if broader markets rise or fall. Their appeal to big investors, such as pension funds and endowments, is that they try to protect money during downturns and generate returns that aren’t correlated to investors’ other holdings.

That could be particularly important this year, when markets might face a bumpier ride as global central-bank policy diverges and a new U.S. president takes office. Many hedge-fund managers say higher volatility could yield big investment gains—so long as they are positioned correctly.

Rob Christian, head of absolute return strategies at Franklin Templeton Investment Solutions, said his unit’s hedge-fund portfolio logged its best performance in five years in 2024. The unit invests more than $10 billion of client money into hedge funds.

His team typically rebalances hedge-fund allocations at year-end, Christian said, but this time is putting more money with managers it thinks have further to run. “We’re pressing our winners,” he said.

That includes long-short equity hedge funds that bet on and against stocks. Anticipating dealmaking will pick up, his team has also marginally increased exposure to merger-arbitrage funds, he said.

The year’s best-performing strategy: funds trading technology, media and telecoms stocks, which averaged a nearly 23% return, according to the PivotalPath data. Those buying and selling distressed credit also did well, as did quantitative stock funds. Those two strategies averaged between 15% and 16%.

Dispersion in equity markets was high, meaning there was a lot of variation in the returns from holding different stocks. That aided firms that focus on shares, giving skillful stock pickers more room to outpace competitors and indexes by picking standout winners or shorting potential losers. Elsewhere, esoteric markets such as Argentine debt, bankruptcy claims tied to defunct crypto exchange FTX and commodities like copper also yielded opportunities.

Some notable performances, according to people familiar with the matter and figures seen by The Wall Street Journal:

From the late 1990s through the aftermath of the global financial crisis, hedge funds often averaged double-digit-percentage annual returns. But that changed as the easy monetary policy of the 2010s tamped down market volatility, and the industry largely shifted from focusing on big, swashbuckling bets to generate steadier returns with a closer eye on risk management.

Swaths of capital flowed into multimanager firms such as Citadel and Millennium, and star traders—who historically might have struck out on their own—joined the firms. Meanwhile, hundreds of hedge funds shut their doors.

There are some signs this might be reversing, said Jon Caplis, chief executive of PivotalPath. He tracks what he calls high-quality hedge-fund debuts, or firms launched by founders leaving managers who oversee $1 billion or more, and expects to see 145 of these from the start of 2024 through the second quarter of this year.

The average launch size is $300 million, he said. “These are very healthy launches.”

Write to Caitlin McCabe at caitlin.mccabe@wsj.com