Hedge funds: a look at the next six months – and beyond

The next six months present a turning point for hedge funds. Despite a challenging start to 2025, where rallies in equities and bonds left hedge funds trailing their benchmarks – the outlook is positive.

Hedge funds thrive on market dispersion, exploiting differences between winners and losers. The first half of the year was dominated by a handful of equities, particularly gold and platinum group metals – or PGM-related – shares, limiting opportunities for hedge fund managers to generate alpha.

However, the second half promises greater dispersion across sectors and stocks, creating the conditions hedge funds need to add value.
Locally, flows into hedge funds continue to increase, and globally, they remain an established allocation across retail and institutional portfolios. There are no structural headwinds threatening their trajectory – if anything, investor interest is deepening as more recognise the role hedge funds play in enhancing portfolio resilience.

Why alternative investments are no longer ‘alternative’
Hedge fund assets in South Africa climbed 34% in 2024, rising from R138 billion to R185.1 billion. This growth reflects a broader shift: investors are rethinking diversification. Alternatives like hedge funds, private equity, private credit, and infrastructure behave differently to traditional asset classes, often showing low or negative correlation to equities and bonds.

When traditional markets stumble, these strategies tend to hold up – offering resilience that is critical in volatile times. Our modelling shows that allocating even 10% to alternatives can significantly improve a fund’s overall risk-return profile. This has made alternatives a core – not peripheral – component of modern portfolios.

Accessibility has improved dramatically too. Hedge funds were once viewed as exclusive, with R1 million minimums and entry limited to qualified investors. Today, retail hedge funds are available from around R2 500 per month on LISP platforms, offering daily liquidity. According to HedgeNews Africa, long-short equity managers delivered over 20% in 2024, outperforming the market’s 15% return.

December: the perfect time to reassess portfolios
December remains a pivotal moment for both hedge funds and individual investors. It is when performance is reviewed against benchmarks, detailed reports are prepared, and portfolio allocations are scrutinised. The end of the year also brings market seasonality – including the so-called “Santa Claus rally” – which can influence short-term strategies. But December is not only about closing the books; it is about planning ahead. Hedge funds use this time to reassess macroeconomic conditions, refresh strategies, and align portfolios with evolving opportunities.

Conducting these reassessments is crucial to keeping investments on track. While December is the traditional window, evaluations should not be confined to a single point in time. Many successful investors also conduct reviews quarterly to ensure strategies stay aligned with financial goals. Market shocks – from interest rate moves to geopolitical events – or personal milestones like retirement should trigger immediate reviews.

Rebalancing is essential whenever asset allocations drift significantly from targets. For hedge funds, timing is even more nuanced, with reassessments often tied to major trades, market cycles, or investor redemption periods at quarter-end. This proactive approach keeps portfolios resilient and well-positioned for the year ahead.

Looking ahead: why the outlook is bright
As we approach 2026, the trajectory for hedge funds remains upward. They are attracting consistent inflows, backed by strong regulatory oversight and increased accessibility. South Africa’s hedge fund regulations rank among the world’s strongest, with retail funds subject to daily pricing, liquidity, clear disclosure, and strict risk controls – dispelling outdated notions that hedge funds are opaque or excessively risky.

Infrastructure, affordable housing, student accommodation, healthcare, and energy remain key investment themes. Hedge funds are also well-positioned to capitalise on market inefficiencies, governance-driven value unlocks, and the greater dispersion expected in the months ahead.

My advice? Partner with managers who have navigated both bull and bear markets. Define your objectives clearly and consider how hedge funds – along with other alternatives – can help you meet them.

Alternatives are not “alternative” anymore. They are essential tools for building resilient portfolios in today’s unpredictable world. The growth we are seeing is proof that investors are beginning to understand this – and the next six months may just confirm why they belong at the centre of modern investment strategy.