Key takeaways:
- The incoming Trump administration, geopolitical risks and diverging economic cycles are expected to drive volatility, requiring hedge funds to adopt cautious and selective positioning in 2025
- We have downgraded Convertible Arbitrage to Neutral due to tighter spreads, while Structured Credit and Global Macro remain well-positioned to capture opportunities from volatility and economic divergence
- Alpha opportunities can be found in single-stock dispersion, resilient consumer credit, and corporate restructuring, while managers must remain vigilant to risks from policy shifts and market dislocations
1. Introduction
As we move into 2025, global uncertainty has ratcheted up further
Our last two quarterly outlooks have made much of the uncertainty facing global financial markets. As we move into 2025, it is difficult to avoid the conclusion that this uncertainty has ratcheted up even further. The incoming US administration under President-elect Donald Trump promises to be a source of considerable unpredictability: from fiscal policy to tariffs, to interference with central bank policy, to geopolitical change. This political disquiet coincides with an equity market characterised by extremely narrow market leadership. The S&P 500 has recorded back-to-back years of exceeding 25% gains (in total return terms), driven by a small handful of stocks. This has led to large dislocations both within the US market and between the US and other regional indices.
Furthermore, the interplay between inflation and interest rates remains more dynamic than at any point in the years preceding 2022. US inflation remains stubbornly above the 2% target, muting expectations for further rate cuts. We believe that even a relatively small uptick in inflation from current levels could reignite investors’ concerns.
2. Our Outlook
We remain cautious on the outlook for hedge fund returns, reflecting the risks of possible short-term volatility during the early stages of the Trump presidency
As a broad theme, we remain cautious on the outlook for hedge fund returns. We are assigning most of our underlying strategy categories as ‘Neutral’ for Q1, consistent with our positioning in Q4 2024. This reflects the risks of possible short-term volatility during the early stages of the Trump presidency.
We have downgraded our outlook on Convertible Arbitrage to Neutral, following several quarters of maintaining a Positive stance, which largely coincided with strong returns from the strategy. Pricing in convertible bonds has become very tight, and the leading returns from the refinancing theme—i.e., companies forced to refinance debt issued at attractive rates during the Covid period—may already have been realised.
We maintain a positive stance on Global Macro, contingent on expectations of higher levels of macroeconomic volatility in 2025, as well as on Micro Quantitative and Market-Neutral Equity Long/Short. These strategies aim to extract alpha from equities regardless of market direction and continue to potentially benefit from higher rates and increased market dispersion. Last quarter, we questioned how long we could sustain a positive outlook for these strategies. While we strive to avoid performance chasing, there continues to be a glut of alpha in this part of the industry and market volatility may extend this trend for longer than we had first envisaged. We also maintain our positive stance on Structured Credit which, in our view, is the most attractive area of the credit complex for those investors who can tolerate lower levels of liquidity, given the continued relative strength of consumers and homeowners.
Figure 1 summarises our stance on different hedge-fund strategies for Q1 2025.
Figure 1. Q1 2025 Outlook Versus Q4 2024 Outlook
3. The Details
3.1 Credit
We remain neutral on Credit Long/Short and Distressed assets. High Yield spreads are near post-Global Financial Crisis (GFC) tights, limiting opportunities to profit from rising prices, while it remains difficult to argue against lower-rated loans that may face financial difficulties. Financial conditions are expected to remain easy in the near term given the robust economy, bid for yield and expected further central bank easing. Although lower rated credits have outperformed in recent months and continue to offer relatively elevated dispersion and idiosyncratic opportunities, overall market volatility has remained subdued, limiting broader opportunities. We expect elevated defaults for leveraged loans in a structurally higher interest rate environment. However, expectations have moderated as markets have rallied and capital market access has eased.
We are shifting to a neutral stance on Convertible Arbitrage, anticipating more moderate returns after two strong years. Convertible bonds have performed well, with broad markets now trading near fair value. Spreads for credit-sensitive names that had lagged US High Yield have tightened significantly, while the success of the refinancing trade and recent positive returns have led to significant hedge fund interest in the asset class. We expect a more idiosyncratic opportunity set in credit-sensitive convertibles, driven by name selection and engaging with issuers around liability management transactions. Potential for policy-driven elevated volatility in equity and rates markets should support traditional volatility-oriented arbitrage positions. Primary markets should remain active, reflecting meaningful 2025/2026 global bond maturities. The key risks are a deep recession/ meaningful pick-up in defaults or a significant uptick in net supply as well as hedge fund deleveraging.
We remain positive on opportunities in Structured Credit in the near term. Credit spreads across sectors of securitised products have continued to normalise but remain above recent lows and wide compared to corporate bonds. Loss-adjusted yields are still elevated. Consumers, overall, remain resilient, although there are pockets of weakness. Household wealth is at record levels, and excess savings have been revised higher. Default and delinquency rates for auto loans and credit cards have risen more slowly and remain concentrated among younger, lower-income borrowers with low credit scores (FICO).
The residential mortgage-backed securities (RMBS) sector continues to benefit from strong house price growth, record homeowner equity and supportive supply-and-demand dynamics. The primary risk is a sharp, broad-based rise in residential or consumer asset backed security (ABS) delinquencies and defaults, driven by persistently high interest rates or a significant increase in unemployment.
3.2 Quantitative Strategies
We remain positive on Micro Quantitative strategies — they remain a reliable source of alpha and continue to attract top talent and managers. This has created credible capacity in 2025
We remain positive on Micro Quantitative strategies—quantitative approaches focused on corporate instruments like equities—but view their recent strong performance with cautious optimism. As with most relative-value-focused strategies, they serve as a consistent source of alpha and continue to attract top talent and managers. This has created credible capacity in 2025, particularly in the multi-asset quantitative space, which has been difficult for investors to access in recent years.
Notably, the strategies have performed well for the last several quarters, driven by the non-zero rate environment and stock volatility. However, we know that the lower turnover strategies enjoyed price momentum from the convergence of global earnings-to-price measures and therefore may be prone to some give-back risk. Accordingly, we are mindful of this and we encourage investors to exercise caution with riskier plays, maintaining balance in portfolios, as we do.
In Macro Quantitative strategies (i.e. quantitative approaches more focused on macro instruments like indices and rates), we maintain our neutral stance, but we are particularly wary of the business pressures we anticipate on managers in this sub-strategy peer-group. In our view, based solely on returns and statistical outcomes, there's a case to be made for a better 2025 after a difficult 2024, but we cannot afford to be short-sighted in quantitative investing, as the themes at play tend to unfold over the longer term.
Our caution reflects the relatively low Sharpe ratio of Macro Quantitative strategies (due to their narrower instrument breadth compared to their Micro counterparts) and we believe that there are higher Sharpe multi-asset quant capacity options available in 2025 – and competitively priced. We believe this will likely be more appealing to investors than standalone Macro Quantitative strategies, particularly given their recent poor performance and their frequent role as a substitute for hard-to-access liquid multi-strategy exposure.
We predict that this shift will push some Macro Quantitative managers to hastily enter the multi-asset quant space in an attempt to bridge the gap. However, not all will succeed— developing expertise in trading micro strategies or equities is a significant challenge, which many managers have intentionally avoided in the past. We see this as destabilising and will respond by increasing our selectivity, focusing on and concentrating with managers with specialised expertise who we believe can deliver both returns and diversification to our portfolios. That said, we believe the best managers—those with the largest teams and the strongest technology and research capabilities—will successfully weather this period of disruption, as they have before, and will remain compelling long-term investments.
3.3 Macro
A soft landing appears likely for the United States, but the outlook for other economies is far less certain, highlighting the need for tailored policy responses as growth pressures intensify
We maintain a positive outlook on Global Macro strategies, anticipating a robust opportunity set in the year ahead driven by rising policy uncertainty, increased volatility and growing economic divergence.
The incoming Trump administration will significantly influence global financial markets, though the specifics around the size, scope and impact of its policies remain unclear.
Shifts in US trade and immigration policy can have significant impacts on growth and inflation both domestically and internationally, with the potential to reshape global trade patterns.
At the same time, differences in economic cycles are likely to widen regional disparities. While a soft landing appears likely for the United States, the outlook for other economies is far less certain, highlighting the need for tailored policy responses as growth pressures intensify. Adding to this, rising political risks in the G10—particularly within the European Union—pose further threats to market stability and may deepen economic decoupling.
3.4 Event Driven
In Event Driven, our outlook for Merger Arbitrage remains neutral for now, however, with a clear tilt toward optimism for 2025. Deal activity has been increasing but remains below historical levels. The antitrust environment, particularly in the US, has remained challenging, with aggressive regulatory actions blocking deals and dampening M&A activity.
However, the Trump administration and Republican majority are expected to adopt a more lenient antitrust stance, encouraging business-friendly deregulation. That said, the full impact of these policy changes will take time to materialise, and we believe that sector-specific challenges—such as those affecting big tech and cross-border deals—are likely to persist. Globally, a rise in US deal activity could drive broader consolidation, particularly in the EU and UK, where signs of a more M&A-friendly environment are emerging. Japan also remains a source of compelling transactions.
Additional supportive factors for M&A include an increase in private equity exits, ongoing shareholder activism, and lower financing rates.
We also remain neutral on Special Situations and other Event Arbitrage strategies. Strong themes and catalysts in 2025 could create dislocations and opportunities, such as oil price volatility, restructuring pressures from EU growth challenges due to tariffs, and pre-event positioning driven by activism and M&A.
Risks include geopolitical tensions, a potential equity market pull-back extending weaker catalysts, or the new US administration falling short of expectations. Arbitrage opportunities remain in areas like dual-listed structure collapses, discrepancies between American Depositary Receipts (ADRs) and domestic lines and a potential recovery in equity capital markets (ECM).
In Asia, corporate governance reforms should continue to unlock value. For example, Japan’s fragmented sectors are likely to drive large corporate restructurings, while Korea offers alpha opportunities if reforms, such as fiduciary duty laws, gain bipartisan support despite ongoing political uncertainty.
3.5 Equity Long/Short
We are maintaining our positive outlook for Market-Neutral Equity Long/Short and neutral outlook for Long-Biased Equity Long/Short. Without aiming to call the direction of the market, there are several reasons to be optimistic about continued single-stock dispersion and the opportunity for alpha generation. That said, the expectations for different global economies vary and as such, we believe equity managers need to be selective in their risk-taking.
Volatility should remain heightened under a Trump administration and amid ongoing geopolitical conflict. Outside the US, we especially favour low-net-exposure strategies given the expected shifts in US trade and immigration policies, which will undoubtedly impact and create further divergence between global economies. Within the US, a more business-friendly regulatory environment is expected to broaden market leadership beyond a handful of mega-cap names. Additionally, policy changes could create beta-driven opportunities for equity sector specialists.
We believe that fundamental research will remain crucial in navigating 2025’s geopolitical and economic challenges
We also anticipate a continued positive cost of capital over the medium term, with limited access for poorly managed or financially weak companies. An expected pickup in IPO activity—after more than two years of tepid issuance—may see weaker companies returning to public markets, creating opportunities for managers willing to take positions outside the IPO trade if these businesses falter post-listing.
In summary, economic policy uncertainty and geopolitical instability persist.
We believe that fundamental research will remain crucial in navigating these challenges. Managers able to identify quality companies will continue to be rewarded as markets favour strong fundamentals.
You are now leaving Man Group’s website
You are leaving Man Group’s website and entering a third-party website that is not controlled, maintained, or monitored by Man Group. Man Group is not responsible for the content or availability of the third-party website. By leaving Man Group’s website, you will be subject to the third-party website’s terms, policies and/or notices, including those related to privacy and security, as applicable.