The hedge fund industry is expected to rebound in 2025,supported by lower interest rates, improved investor sentiment, and the use ofartificial intelligence (AI) in investment processes. According to a recentreport by IG Prime, these factors are driving renewed interest in the sector,which is showing signs of recovery after several years of challenges. New fundlaunches are on the rise, and assets under management have reached recordhighs.Global Overview and OutlookIn 2024, the hedge fund industry faced rising costs,regulatory pressures, and uneven returns. The Federal Reserve’s 50 basis pointrate cut that year marked a shift. Lower interest rates make it easier forhedge funds to outperform safer investments. Increased market volatility,driven by geopolitical tensions and economic uncertainty, also created morechances for profits.The election of Donald Trump as U.S. president in November2024 added to positive sentiment. His administration is expected to adoptpolicies favorable to hedge funds. The appointment of Scott Bessent, a hedgefund veteran, as Treasury Secretary is seen as a signal of regulatory easing.This could influence other regions competing to attract investment.AI IntegrationAI is increasingly used by hedge funds, with 86% of managersemploying generative AI tools. AI supports data processing, predictiveanalytics, algorithmic trading, and fraud detection. A survey found 64% ofmanagers see AI as most impactful on forecasting, while 52% highlight dataanalysis benefits.However, AI’s ability to consistently generate excessreturns is uncertain. The Eurekahedge AI Hedge Fund Index has underperformedthe S&P 500 recently. Questions remain about whether AI’s costs justify itsreturns. Regulators are also concerned that AI could increase risks of marketmanipulation and herd behavior. Despite this, AI is valued for improvingoperations, risk management, and client services.Performance and StrategiesHedge fund results in 2024 were mixed. Macro fundsstruggled, but multi-strategy and systematic funds performed well. Long equitystrategies benefited from gains in global stocks, especially in U.S. technologyshares. Event-driven strategies also gained due to increased merger andacquisition activity.Looking ahead, multi-strategy funds remain favored, followedby emerging market and equity long/short funds. Credit strategies, especiallyprivate credit, continue to attract interest for their resilience in volatilemarkets.Fee Trends and Investor ExpectationsInvestor demand is shifting toward lower fees and closeralignment with fund performance. The traditional “2-and-20” fee model isdeclining, with current averages around 1.35% management fees and 16%performance fees. More funds are introducing “cash hurdles,” chargingperformance fees only if returns exceed the risk-free rate. This reflectsinvestor dissatisfaction with high fees amid average returns.Private Markets and Digital AssetsPrivate markets remain attractive, with private equity andcredit driving growth. The private credit market exceeded $3 trillion in assetsunder management in 2024. Stricter banking rules and the search for higheryields contribute to this trend. Digital assets are also growing, with 47% ofhedge funds having cryptocurrency exposure. The approval of Bitcoin andEthereum ETFs and clearer regulations helped increase confidence.Outlook for 2025The industry is positioned for growth in 2025, aided bylower interest rates, technological progress, and a more supportive regulatoryenvironment. Multi-strategy and credit funds are expected to perform strongly.AI and private markets will continue as growth areas. Smaller funds may facechallenges competing with larger firms, potentially leading to consolidation.This article was written by Tareq Sikder at www.financemagnates.com.