What's happened
Hedge funds posted strong 2025 returns, with small funds outperforming larger ones amid rising correlations with equities. Private equity firms struggle with record backlogs and deal activity, while new funds and leadership changes mark industry shifts. Market turbulence and geopolitical tensions continue to influence strategies.
What's behind the headline?
The 2025 performance highlights a resilient hedge fund industry, with notable gains across major firms and strategies. However, the rise in correlations with the broader market signals increased systemic risk, especially as multistrategy funds show their highest correlation to equities since 2011. This trend suggests that hedge funds may become more vulnerable to market downturns, contradicting their traditional role as uncorrelated assets.
Private equity's backlog of over 31,000 companies underscores ongoing difficulties in deal-making, exacerbated by high interest rates and a cautious investment environment. The use of continuation vehicles by firms like Clearlake indicates a strategic shift to manage assets temporarily, but this may delay the inevitable need for market-driven exits.
Meanwhile, new leadership and fund launches, such as Paloma's efforts to diversify and attract talent, reflect an industry seeking stability and innovation amid turbulence. The emergence of smaller hedge funds outperforming larger peers suggests a shift towards agility and niche strategies, which could redefine competitive dynamics.
Overall, 2026 will likely see continued industry adaptation, with increased focus on managing systemic risks, navigating geopolitical tensions, and balancing growth with caution. The industry’s resilience will depend on how well firms can mitigate correlations and backlog issues while capitalizing on new opportunities.
What the papers say
Business Insider UK reports that hedge funds achieved a 10.8% gain in 2025, with small funds outperforming larger ones amid rising correlations with equities. The article highlights the industry’s record backlog of over 31,000 unsold companies, prompting private equity firms like Clearlake to use continuation vehicles to manage assets temporarily. The New York Times notes that private equity's deal activity remains subdued despite some recovery, with firms like Thoma Bravo unable to sell certain assets. Both sources emphasize the ongoing challenges in deal-making and the strategic shifts within the industry, including leadership changes and new fund launches. The contrasting perspectives underscore the resilience of hedge funds' performance versus the structural issues faced by private equity, with industry leaders adopting different tactics to navigate the turbulent environment.
How we got here
The hedge fund industry experienced a record-breaking 2024, leading to high investor confidence in 2025, with gains across most strategies. Private equity faced a backlog of over 31,000 unsold companies due to high interest rates and market conditions, prompting firms like Clearlake to use continuation vehicles. Leadership changes and new fund launches continue to reshape the industry landscape, amid geopolitical tensions and evolving investor strategies.
Go deeper
Common question
-
Which hedge funds are expected to lead in 2026?
As we look ahead to 2026, investors and industry watchers are eager to identify which hedge funds will dominate the landscape. With new strategies emerging and firms adapting to economic shifts, understanding the key players and their approaches is crucial. Below, we explore the top hedge funds to watch, their innovative tactics, and how they are preparing for the year ahead.
-
How Is the Israel-Gaza Conflict Affecting Global Tensions?
The ongoing Israel-Gaza conflict is not just a regional issue — it’s influencing global politics, security, and communities worldwide. From rising antisemitism to international responses, many are asking how this conflict impacts the world at large. Below, we explore key questions about its broader effects and what might happen next.
-
What Are Continuation Funds in Private Equity?
Private equity firms are increasingly turning to continuation funds to manage their growing backlog of unsold assets. These funds allow firms to hold onto investments longer, sell assets internally, and delay exits until market conditions improve. But what exactly are continuation funds, and how do they impact investors and the industry? Below, we explore the key questions around this emerging trend and what it means for the future of private equity.
-
What Are Private Equity Firms Doing with Unsold Companies?
Private equity firms are currently navigating a challenging landscape marked by high interest rates and a record backlog of unsold companies. To manage this, many are turning to innovative strategies like continuation funds, which allow them to hold onto assets longer and delay sales. This approach raises questions about the long-term health of the industry, the impact on investors, and what these tactics mean for the broader economy. Below, we explore the latest trends and what they could mean for you.
-
Why Did Hedge Funds Perform So Well in 2025?
Hedge funds have seen impressive gains in 2025, but what's behind their strong performance? Are these gains sustainable, or are there hidden risks investors should be aware of? Below, we explore the key factors driving hedge fund success this year and what it means for investors moving forward.
-
Why Did Hedge Funds Perform So Well in 2025?
Hedge funds achieved impressive gains in 2025, outperforming many expectations. But what factors contributed to their success? Are these gains sustainable, or are there underlying risks investors should be aware of? Below, we explore the key reasons behind hedge fund performance this year and what it means for investors moving forward.
-
Market Outlook 2026: Are Rising Risks Changing Investment Strategies?
As we step into 2026, investors are facing a landscape marked by rising risks and shifting market dynamics. From strong hedge fund performances to private equity challenges, understanding these trends is crucial for making informed decisions. Below, we explore the main risks facing markets this year, whether rising hedge fund returns are a cause for concern, how private equity correlations impact portfolios, and what strategies experts are recommending now.
-
How Did Hedge Funds Perform in 2025?
In 2025, hedge funds experienced notable gains despite ongoing market challenges. Small hedge funds outperformed their larger counterparts, driven by market volatility and strategic flexibility. But what does this mean for investors now and in the future? Below, we explore key questions about hedge fund performance, market trends, and what to expect moving forward.
-
Why Did Hedge Funds Perform So Well in 2025?
Hedge funds achieved impressive gains in 2025, driven by strategic shifts and market conditions. But what exactly fueled their success? From macro strategies to smaller fund outperformance, explore the key factors behind hedge fund performance last year and what it means for investors today.
-
What Are the Main Challenges Facing Hedge Funds and Private Equity in 2026?
Investors and industry insiders are keenly watching how hedge funds and private equity firms navigate the turbulent financial landscape of 2026. With record backlogs, shifting strategies, and geopolitical tensions, understanding these challenges is crucial for making informed decisions. Below, we explore the key questions about industry performance, strategic shifts, and the impact of global tensions on investment strategies.
More on these topics
-
Private equity typically refers to investment funds, generally organized as limited partnerships, that buy and restructure companies.
-
California is a state in the Pacific Region of the United States. With 39.5 million residents across a total area of about 163,696 square miles, California is the most populous U.S. state and the third-largest by area, and is also the world's thirty-fourt
-
Clearlake Capital Group, L.P. is a private equity firm founded in 2006 that focuses on the technology, industrial and consumer sectors. The firm is headquartered in Santa Monica with affiliates in Dallas, London and Dublin. In 2022, the firm was a part...
-
Brevan Howard is a European hedge fund management company based in Jersey with its funds domiciled in the Cayman islands. The company was co-founded by Alan Howard and four others in 2002.
-
Bridgewater Associates is an American investment management firm founded by Ray Dalio in 1975. The firm serves institutional clients including pension funds, endowments, foundations, foreign governments, and central banks.