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Investor demand for hedge funds to improve their returns has led to more of them to invest in a wider array of alternatives such as private credit, private equity and private real estate as some of the more "traditional" hedge fund strategies have failed to deliver over the last few years.

61% of hedge funds say they now invest in private equity, 45% in private real estate, 39% in private credit/debt and 38% in infrastructure.

Demand for investment in private markets from investors has also been driven by a global trend towards delisting from stock markets, and companies holding off from IPOs for longer. These are expected to continue driving growth for private markets in the future.

Their expansion into private markets means hedge funds are increasingly competing with private equity funds who have also been expanding from private equity into other private asset classes such as infrastructure, private credit and real estate.

Says Chris Beauchamp, Chief Market Analyst at IG Prime: "The growth of hedge funds has meant that there has been a crowding of trades that have traditionally worked well for them. Arguably some of the opportunities have been arbitraged away which has driven funds to look for new ways of getting index-beating returns. Many hedge funds are seeing private markets as an answer."

Private equity is the private market asset class with the fastest growth amongst hedge funds, with 58% of hedge funds saying it's the area they've most increased exposure in during the last year. Hedge fund managers are also increasing their exposure in real estate (48%), private credit (31%), infrastructure (30%) and natural resources (34%).

Despite its growing popularity, higher interest rates and uncertainty about the future of markets made private equity more difficult in 2024. That may change in the second half of this year as tariff levels continue to move down from their "worst case" scenarios.

While private equity suffered in 2024, private credit has continued to grow rapidly - 31% of hedge funds counted private credit as the area of greatest growth within private markets.

Stricter banking regulation and the withdrawal of bank lending has made private credit an important alternative for borrowers.

Says Chris Beauchamp: "While most hedge funds see private equity as the substantial growth investment in private markets, demand for hedge funds that invest in private credit have also been particularly strong."

"The question for hedge funds is what skills they bring to bear in these private market that might give them the edge over existing participants such as PE funds. Some will be competing directly with PE and private credit funds for the same investments. Others will be hoping that they can use the current tariff related disruption to pick up assets priced for distress."