Almost three quarters (70 per cent) of hedge funds now invest in private markets, research from IG Prime has found.

The prime broker for hedge funds, family offices, and other institutions noted that investor demand for hedge funds to improve their returns had led to greater investment in a wider array of alternatives.

These alternatives include private credit, private equity, and private real estate, with IG Prime stating that some of the more ‘traditional’ hedge fund strategies had failed to deliver over the past few years.

Nearly two thirds (61 per cent) of hedge funds now invest in private equity, while 45 per cent invest in private real estate, 39 per cent in private credit/debt, and 38 per cent in infrastructure.

The global trend towards delisting from stock markets and companies delaying IPOs for longer has also increased demand from investors for investment in private markets, with these factors expected to continue driving growth for private markets going forward.

Hedge funds are increasingly competing with private equity funds as they expand into private markets, as private equity funds have also been expanding into other private asset classes.

“The growth of hedge funds has meant that there has been a crowding of trades that have traditionally worked well for them,” said IG Prime chief market analyst, Chris Beauchamp.

“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 was the private market asset class with the fastest growth amongst hedge funds, according to IG Prime, with 58 per cent of hedge funds saying it’s the area they have increased their exposure to the most over the past year.

Hedge fund managers were also increasing their exposure to real estate (48 per cent), natural resources (34 per cent), private credit (31 per cent), and infrastructure (30 per cent).

While private equity had grown in popularity, IG Prime noted that higher interest rates and uncertainty about the future of markets had made private equity more ‘difficult’ in 2024, although this could change in the second half of the year as potential ‘worse case’ tariff fears subside.

Private credit has continued to grow “rapidly”, according to IG Prime, with 31 per cent of hedge funds citing private credit as the area of greatest growth within private markets amid stricter baking regulation and the withdrawal of bank lending.

“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,” stated Beauchamp.

“The question for hedge funds is what skills they bring to bear in these private markets that might give them the edge over existing participants such as private equity funds.

“Some will be competing directly with private equity 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.”

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