Hedge funds have to a certain extent won back a reputation for being able to generate gains when other markets are choppy – an important attraction for wealth managers.

Hedge funds gained in January, navigating a volatile market with sharp falls in “Magnificent Seven” tech stocks such as those of Nvidia, and the arrival of a new US president vowing to impose tariffs on a mass of nations.

The HFRI Fund Weighted Composite gained 1.4 per cent for the month, led by the directional HFRI Equity Hedge Index, which advanced 2.1 per cent, Hedge Fund Research, a Chicago-based organisation, said in a report. 

Given policy moves by the Trump administration – such as threatened tariffs against China, Canada and Mexico, and fears that China’s DeepSeek AI app would severely undercut US AI equivalents – January proved to be a difficult month. Hedge funds have, in recent years, won back a reputation for being able to generate gains when other markets are choppy – important attractions for wealth managers, family offices and private banks seeking portfolio “ballast.”

“Many financial market risks have shifted and evolved but not fallen, with geopolitical risk shifting from election outcomes and military conflicts to policy changes and conflict resolution; inflation and interest rate risks remain, while expectations for continued growth in AI-fuelled large cap technology are in some cases tempered by high capital expenditures and intense global competition,” Kenneth Heinz, HFR president, said. “Managers have been positioning for this dynamic environment for several months, with intensive positioning since the US election in November, and it is likely that managers are positioned for acceleration of these policy changes throughout 1H25.”

The HFR Cryptocurrency Index extended its 2024 gains, adding 0.36 per cent in January on the favourable outlook for cryptocurrency by the incoming Donald Trump administration. 

Hedge fund performance dispersion contracted slightly in January, as the top decile of the HFRI FWC constituents advanced by an average of 7.9 per cent, while the bottom decile fell by an average of -4.1 per cent, representing a top/bottom dispersion of 12.0 per cent for the month. By comparison, the top/bottom performance dispersion in December 2024 was 13.2 per cent

Equity Hedge funds, which invest long and short across specialised strategies, extended 2024 gains; the HFRI Equity Hedge (Total) Index advanced by 2.1 per cent. 

Uncorrelated macro strategies also rose as interest rates fell while commodities gained, with the HFRI Macro (Total) Index adding 1.0 per cent in January, while the HFRI Macro Asset Weighted gained 2.0 per cent. Event-driven strategies, which often focus on out-of-favour, deep value equity exposures and speculation on M&A situations, also gained in January as recent policy changes have increased expectations for a strong M&A cycle in 2025. The HFRI Event-Driven (Total) Index advanced 0.9 per cent in January; the HFRI ED: Activist Index jumped 2.4 per cent.

January 2025 index performance figures are estimated as of 7 February, HFR added.