Hedge funds are increasingly turning to private markets to boost returns—extending well beyond well-known players like Tiger Global and D1 Capital, which have long operated in the sector.
A new research report from prime broker IG Prime, released Monday, shows that 70 percent of hedge funds are now investing in private equity, private credit, and real estate. This marks a notable strategic shift. In 2018, for instance, Preqin’s Hedge Fund Spotlight barely registered hedge fund activity in private markets, reflecting the industry’s traditional focus on equities, multistrategy funds, and credit.
This pivot also places hedge funds in direct competition with private equity firms for deals and investors. According to IG Prime, the shift is largely driven by investor demand for stronger returns after years of underperformance.
In 2024, Institutional Investor reported that allocators were losing interest in hedge funds due to their failure to provide inflation protection. While some cited diversification benefits, only 18 percent of large endowments and 7 percent of public pensions had allocations to hedge funds. Despite investors and managers expecting allocations to rebound in 2025, there’s been little improvement so far.
But there’s a big caveat when analyzing performance. Most hedge funds above $1 billion in assets don’t share their data to the commercial databases. But without these funds, hedge fund performance looks dismal. Once these hedge funds are added to the data set, average performance rises by more than two percentage points. Efforts are underway to fix this problem, but most investors are still in the dark about it.
Still, IG Prime’s data suggests that hedge funds are unsettled enough by market dynamics to pivot to new markets, even if that may not address the fundamental problem. According to the report, 61 percent of hedge funds now invest in private equity, 45 percent in private real estate, 39 percent in private credit, and 38 percent in infrastructure. A shrinking public market—with fewer IPOs and more companies being taken private—is accelerating the trend.
The growth of hedge funds has led to a crowding of trades that once worked well, said Chris Beauchamp, chief market analyst at IG Prime. Some of those opportunities have arguably been arbitraged away, prompting funds to search for new ways to outperform. Many are now turning to private markets as the answer, but this brings uncertainty.
“There is the question as to how adaptable the short-term investment style of most hedge funds is to the longer-term investment horizons of private equity and infrastructure," he said. "Some hedge funds would also have to add bandwidth if they want to match the size of teams that PE funds bring to bear to manage their individual investments.”
