Asian investors turn to hedge funds

HEDGE funds are attracting fresh capital from Asian investors looking beyond traditional stocks and bonds, with volatile debt markets, geopolitical uncertainty and growing concerns about concentration in artificial intelligence (AI) shares prompting a rethink of portfolio strategies.

The trend could gather pace as pension funds, family offices, sovereign investors and private banking clients seek more flexible ways to manage volatility and preserve returns, although the growing role of hedge funds in financial markets also raises questions about how they might amplify losses when conditions deteriorate.

Reuters recently highlighted that Asian investors were increasingly turning to alternative investment managers to diversify their portfolios, challenging the traditional approach of relying primarily on equities and fixed income.

The shift comes as the performance of conventional investment strategies faces greater scrutiny and investors reconsider the widely used 60/40 portfolio, which allocates 60% of assets to equities and 40% to bonds, the newswire notes.

The strategy rests partly on the assumption that bonds can cushion portfolios when shares fall.

However, recent market movements have weakened that relationship, encouraging investors to consider investments whose returns are less closely tied to the direction of conventional markets.

At Swiss private bank Union Bancaire Privée (UBP), the proportion of Asia-based discretionary portfolio management clients with mandates dedicated solely to hedge funds has more than tripled since the end of 2024, the bank tells Reuters, without disclosing the underlying figures.

“US Treasuries and government bonds have become a less reliable diversifier over the last few years,” says Paras Gupta, head of discretionary portfolio management Asia at UBP, adding that this has widened the role hedge funds can play in portfolios.

The growing interest comes after a strong period for the industry. Global hedge fund assets increased by US$409bil in the second quarter of 2026 to US$5.6 trillion, the largest quarterly increase on record, according to data from Hedge Fund Research (HFR) cited by Reuters.

Performance has also helped draw investors towards the sector, particularly as bond markets have endured a prolonged period of weakness.

A global hedge fund index tracked by HFR gained 12.4% in 2025, marking its third consecutive year of positive returns and its strongest performance since 2009. The index has advanced another 7% year-to-date.

By comparison, global equities have performed strongly over the longer period, while government bonds have struggled. Since the end of 2024, the MSCI World Index has gained about 36%, whereas the FTSE World Government Bond Total Return Index has fallen 7%, Reuters reports.

The contrasting returns underline why investors are looking beyond conventional asset classes, particularly when bonds no longer provide the degree of protection they expect during periods of market turbulence.

For institutional investors, the attraction is not necessarily to replace their existing holdings but to add strategies that can generate returns under different market conditions.

“We do want to bring in more on the alternative asset classes,” says Rani Piputri, senior director of public investment at Danantara Investment Management, which is part of Indonesia’s sovereign wealth fund and is aiming for a 5% allocation to hedge funds.

“Because we want to have a stable return with minimum drawdown,” she tells Reuters.

The emphasis on limiting losses reflects a broader effort to improve portfolio resilience rather than simply maximise returns during a rising market.

Niall O’Sullivan, global chief investment officer at strategic adviser Marsh, tells Reuters that some institutional investors who previously had no hedge fund exposure were now looking to allocate roughly 10% of their portfolios to the sector.

Multi-strategy funds with low correlations to broader markets have been among the areas attracting interest.

The trend extends across wealth managers, family offices and major institutional investors, including Japanese defined-benefit pension funds, where the weakening diversification benefits of bonds have become a particular concern, Adeline Tan, head of investments at Marsh Asia, tells Reuters.

Uneven market performance

Beyond diversification, the increasingly uneven performance of markets is providing another reason for investors to consider hedge funds, particularly managers using long-short strategies.

Rather than relying solely on markets rising, these managers can take long positions in securities they expect to outperform and short positions in those they believe will underperform. This approach can potentially benefit from differences in company performance, even when the wider market is directionless.

Such opportunities have become more apparent as the AI investment boom creates a sharper divide between companies benefiting from the technology and those facing disruption.

Geopolitical tensions and differences in economic performance between regions are also contributing to the divergence, creating potential opportunities for managers able to identify relative mispricing.

“Within tech, you have semiconductors outperforming software...(the) United States is outperforming the rest of the world,” Daryl Ho, senior investment strategist at DBS Bank, tells Reuters.

For investors, this divergence matters because broad market exposure can conceal substantial differences beneath the surface.

A portfolio concentrated in a handful of high-performing technology shares, for example, could face greater risks if investor enthusiasm shifts or earnings expectations change.

Albert Yang, head of alternative investments for Asia at J.P. Morgan Private Bank, says that hedge funds are increasingly being used as a long-term allocation to manage volatility, citing mounting concerns about concentration risk in AI.

Yang says the move towards hedge funds was not intended to replace traditional portfolios but to complement them with additional strategies and greater resilience.

Acadian Asset Management, a US$233bil systematic investment manager that analyses data on tens of thousands of companies and runs strategies designed to modestly but consistently outperform equity indices, has seen its assets in Asia quadruple over four years.

“It’s been 20 years since we think we’ve seen this level of interest,” Kelly Young, Acadian’s chief executive officer, says.

Growing influence brings risks

The industry’s expansion, however, comes with a wider financial stability consideration. While hedge funds can improve market liquidity and help investors transfer risk, their trading strategies and funding arrangements can also magnify market movements when volatility rises.

In its recently released Global Financial Stability Report, the International Monetary Fund (IMF) highlighted the growing importance of hedge funds in global financial markets, noting that their assets have expanded substantially faster than those of most other non-bank financial segments since the global financial crisis.

By early 2026, hedge funds’ gross assets had reached about US$13 trillion, up from US$4 trillion in 2013, according to the IMF.

Although they account for only about 5% of total non-bank financial intermediation, their growing presence in trading, liquidity provision and risk transfer has made them increasingly important in the transmission of financial shocks.

The IMF’s figures use gross assets, which are not directly comparable with the US$5.6 trillion industry asset figure reported by HFR. The measures capture different aspects of the sector and should not be treated as equivalent estimates of its size.

The IMF notes that its analysis on hedge fund trading behaviour, market impact, and vulnerabilities suggest that the funds play a dual role in securities markets.

“In tranquil times, hedge funds tend to improve price discovery and market liquidity,” it says.

“During periods of stress, however, hedge fund vulnerabilities can amplify price dynamics, contributing to higher volatility,” it cautions.

The resilience of hedge fund balance sheets and funding arrangements is, therefore, critical in determining whether they dampen or amplify shocks, it says.