Key Takeaways
- • Hedge funds delivered an average return of 11.8% in 2025 and 11.9% in 2024, marking a second consecutive year of double-digit performance and outpacing traditional 60/40 equity-bond portfolios every year since the Federal Reserve began raising rates in 2022.
- • More than 90% of allocators—including pension funds, family offices, and funds of funds surveyed by Goldman Sachs (317 firms)—report that their hedge fund portfolios met or exceeded expectations in 2025, with over 80% meeting or beating expectations over the past five years.
- • Allocator demand for increased hedge fund exposure has reached record levels, with 49% of surveyed institutions planning to increase exposure in 2026, up from 37% a year earlier, and only 4% planning to decrease exposure (net +45% seeking increased exposure).
- • Quantitative hedge funds are the most sought-after strategy, with 25% of allocators expecting to add exposure in this category, driven by demand for strategies with lower correlation to traditional assets.
- • The performance rebound reflects structural shifts following the end of quantitative easing; hedge funds underperformed 60/40 portfolios by ~50 basis points annually during the 2010s but have outperformed by nearly 190 basis points per year since 2022.
Summary
Hedge funds have cemented their position as outperformers in institutional portfolios, posting their second consecutive year of double-digit returns and driving record allocator demand for increased exposure. According to a Goldman Sachs survey of 317 allocating institutions—including pension funds, family offices, and funds of funds—hedge funds returned an average of 11.8% in 2025, building on 11.9% returns in 2024. This consecutive outperformance marks a significant inflection point: hedge funds have now beaten a traditional 60/40 equity-bond portfolio every year since the Federal Reserve began its interest-rate hiking cycle in 2022.
Institutional confidence in hedge fund performance has translated into concrete capital deployment plans. More than 90% of allocators report that their hedge fund portfolios met or exceeded expectations in 2025, while over 80% achieved the same outcome over the past five years. This confidence is driving unprecedented appetite for increased allocations: 49% of surveyed institutions plan to boost hedge fund exposure in 2026, up sharply from 37% a year earlier. Only 4% of allocators plan to decrease exposure, resulting in a net +45% seeking increased allocation—the highest figure in Goldman Sachs' dataset extending back to 2017.
The strategy-level preference reveals sophisticated allocator thinking around portfolio construction. Quantitative hedge funds have emerged as the most sought-after category, with 25% of allocators expecting to add exposure in this area. This concentration of demand reflects broader institutional priorities: allocators are specifically targeting hedge fund strategies with lower correlation to traditional asset classes, seeking diversification benefits beyond what conventional equity and bond exposures provide.
The current performance environment represents a structural reversal from the prior decade. During the 2010s, when the Federal Reserve maintained quantitative easing and suppressed volatility, hedge funds significantly underperformed 60/40 portfolios, lagging by approximately 50 basis points annually. Since the Fed terminated quantitative easing and rates normalized in 2022, the performance gap has inverted dramatically: hedge funds have outperformed 60/40 portfolios by nearly 190 basis points per year. This shift underscores how regime changes in monetary policy and interest-rate environments fundamentally alter the relative attractiveness of alternative investment strategies.
Institutional confidence in hedge fund performance has translated into concrete capital deployment plans. More than 90% of allocators report that their hedge fund portfolios met or exceeded expectations in 2025, while over 80% achieved the same outcome over the past five years. This confidence is driving unprecedented appetite for increased allocations: 49% of surveyed institutions plan to boost hedge fund exposure in 2026, up sharply from 37% a year earlier. Only 4% of allocators plan to decrease exposure, resulting in a net +45% seeking increased allocation—the highest figure in Goldman Sachs' dataset extending back to 2017.
The strategy-level preference reveals sophisticated allocator thinking around portfolio construction. Quantitative hedge funds have emerged as the most sought-after category, with 25% of allocators expecting to add exposure in this area. This concentration of demand reflects broader institutional priorities: allocators are specifically targeting hedge fund strategies with lower correlation to traditional asset classes, seeking diversification benefits beyond what conventional equity and bond exposures provide.
The current performance environment represents a structural reversal from the prior decade. During the 2010s, when the Federal Reserve maintained quantitative easing and suppressed volatility, hedge funds significantly underperformed 60/40 portfolios, lagging by approximately 50 basis points annually. Since the Fed terminated quantitative easing and rates normalized in 2022, the performance gap has inverted dramatically: hedge funds have outperformed 60/40 portfolios by nearly 190 basis points per year. This shift underscores how regime changes in monetary policy and interest-rate environments fundamentally alter the relative attractiveness of alternative investment strategies.
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