Multi-strategy hedge funds may be the key for investors to navigate market uncertainties and volatility in 2025, although such funds underperformed 60-40 portfolios last year.

In 2024, the 60-40 model ( 60% equities, 40% bonds ) beat multi-strategy hedge funds because of the strong performance of equities and modest performance of bonds. The question now is, will it do so again in 2025?

Experts agree that by integrating multi-strategy hedge funds into a 60-40 portfolio, investors can improve resilience, capture diversified sources of return, and navigate the uncertainty and volatility expected in 2025.

“This approach enhances portfolio stability and performance in challenging market conditions. With uncertainty around inflation, central bank policies, and geopolitical risks in 2025, multi-asset hedge funds can help to pivot strategies to adapt to prevailing conditions. By allocating 10-20% of a portfolio to multi-strategy hedge funds, the portfolio can significantly improve diversification without overexposure,” says an asset manager who specializes in multi-strategy hedge funds.

Lower volatility

Hedge funds often aim to deliver returns with lower volatility by diversifying across risk factors and employing sophisticated risk management techniques, and this stability can complement the higher volatility of a traditional 60-40 portfolio.

But the asset manager warns that while multi-strategy hedge funds could excel in a volatile or declining market, overall performance hinges on the manager’s skills and macroeconomic tailwinds.

Cost is another factor to consider. Multi-strategy hedge funds often charge higher fees, commonly known as the "2 and 20", a common fee structure used by hedge funds, where fund managers charge investors a 2% annual management fee and a 20% performance fee on profits.

“In some cases, such fees eat into the overall earnings of the fund and must be weighed against their performance benefits. Also, some multi-strategy funds may have limited liquidity, requiring alignment with the investor's time horizon,” the asset manager says.

In 2024, hedge funds in Asia experienced their best performance in 15 years based on the HFRI Asia with Japan Index, which tracks hedge funds that mainly invest in the region. The index rose by 12.1% last year, its best annual growth since 2009.

However, this was lower than the performance of a traditional 60-40 model portfolio, which yielded 15% returns, riding on the back of a strong equities market and modest performance of the fixed income market.

The S&P 500 equity index surged by 23.3% in 2024, while the S&P US Treasury Bill Index, which tracks government bonds, achieved a 5.3% return, and the S&P 500 Bond Index, representing corporate bonds, posted a 2.3% return.

Source: Tradingview

Partial to equities

While the equity market's performance in 2025 will depend on various factors, including economic conditions, corporate earnings, interest rates, geopolitical events, and investor sentiment, many asset managers favour equities based on their market outlook for the year.

Goldman Sachs Asset Management, for example, anticipates a broadening of stock market returns, driven by rate cuts and sustained monetary easing. GSAM favours US large- and mid-cap stocks, international markets, and small-cap equities.

J.P. Morgan Asset Management also favour equities but emphasizes the benefits of diversifying beyond the US market and into European and Asian markets that offer distinct sector exposures and valuation advantages.

While these views don’t guarantee that the equity market will outperform in 2025, they highlight the strength of having equities as a core asset class in a 60-40 portfolio for the year.

In general, asset managers are optimistic about the performance of equities in 2025, although they emphasize the importance of diversification, active management, and awareness of market concentration risks.