Outlook Hedge Funds
Disclaimer: The information and materials prepared are for internal use only and on how the Dancap Family Investment Office (“Dancap”) views current market dynamics. Dancap does not guarantee the accuracy or completeness of the material and it is not intended in any manner to be investment, financial, legal, accounting, tax or other advice and should not be relied upon.
Dancap's Current Hedge Fund Outlook
February, 2025
Dancap has a strong history of investing in hedge funds across a wide range of strategies, utilizing both third-party managers and separately managed accounts. This market overview aims to provide an update on the broader hedge fund industry, including current market dynamics, outlook, and potential risks. Dancap’s hedge fund portfolio is strategy-agnostic, partnering with managers who possess extensive track records and expertise across various market cycles. We prioritize flexibility and liquidity in our investments, actively avoiding funds with hard lockups and side pockets, ensuring alignment with our investment philosophy and the liquidity needs.
Hedge Fund Strategy
In this current high interest rate and more volatile environment, relative value-oriented strategies can be particularly compelling due to their ability to generate alpha through a long/short approach, capturing relative market movements across single stocks, sectors, and asset classes. These strategies typically exhibit low correlation with broader markets with diversification benefits. Furthermore, equity long/short and equity market-neutral strategies remain highly attractive, leveraging stock-picking skills, prudent use of leverage, and risk management to try to deliver consistent performance while maintaining liquidity and flexibility. Historically, these hedge fund strategies have performed strongly when interest rates exceed their long-term average of approximately 2.6%, as highlighted in the chart below.
Source: Morgan Stanley 2025 GIMA Alternatives Investment Themes
The current environment appears to create opportunities for strategies that can adapt quickly. Discretionary macro strategies seem well-suited to leveraging macroeconomic trends and market shifts, allowing for tactical adjustments to potentially capitalize on evolving opportunities. Similarly, systematic macro strategies, such as managed futures, may offer the ability to perform during equity market downturns by focusing on liquid markets and minimizing emotional biases. With rising market risks – driven by high valuations, tight credit spreads, policy changes, and geopolitical tensions – macro strategies are increasingly seen as a potential tool for diversification. Their historically low correlation with traditional assets like stocks and bonds could help improve a portfolio’s balance between risk and return. Systematic macro strategies, including managed futures, have shown an ability to deliver consistent performance in challenging market conditions.
Source: Morgan Stanley 2025 GIMA Alternatives Investment Themes
Hedge Funds Outlook
In 2024, hedge funds demonstrated impressive performance, with average return of approximately 11%, as reported by Reuters. This was driven in part by a strong 23% gain in the S&P 500, with long/short equity strategies standing out due to their ability to capitalize on market dispersion and employ innovative shorting methods. Multi-strategy funds also contributed significantly, maintaining their position as a consistent source of alpha relative to traditional benchmarks. For 2025, the outlook for hedge fund performance remains optimistic. Key drivers include monetary easing from central banks, such as the Federal Reserve, and pro-business policies introduced by the re-elected Trump administration. These factors, combined with ongoing geopolitical uncertainty, are expected to create opportunities for macro strategies, which may benefit from shifts in interest rates, foreign exchange , and commodity markets. Additionally, event-driven strategies and merger arbitrage could thrive amid increased deal making activity fueled by favorable tax policies and private equity investment.
To see the Dancap Hedge Fund Investment Criteria and Portfolio, please click here.