By Peter Rudegeair

Investors are warming up to hedge funds after years of giving them the cold shoulder.

Pension funds, foundations and others that allocate money to outside investment firms ranked hedge funds as the most sought-after corner of the industry for 2025, according to a new survey from Goldman Sachs's prime-brokerage unit. For much of the 2010s and early 2020s, uneven performance and high costs caused many hedge funds to fall out of favor.

The new enthusiasm follows a year in which hedge funds produced strong and unusually broad-based returns. Fund investors are also showing more willingness to stomach higher fees, though they want some strings attached.

Here are some of the findings of Goldman's survey of 275 hedge-fund managers and 358 fund investors and intermediaries:

-- About 27% of investors plan to increase their exposure to hedge funds in 2025, net of those looking to decrease their exposure. That is the highest proportion Goldman recorded since it started the survey in 2016. It topped the net 19% of investors that want to place more money with private-credit firms, the most sought-after strategy for 2024.

-- Hedge funds gained 12.2% in 2024, their best performance since 2020, and beat a 60/40 portfolio of global stocks and bonds by about 2 percentage points. Typically when stock markets rally, as they did in 2024, hedge funds underperform a 60/40 portfolio.

-- Seven of the eight hedge-fund strategies Goldman tracked experienced net outflows in 2024, though positive performance meant that their assets under management still expanded. Quants were the only group that experienced net inflows.

-- The average management fees that investors paid to hedge-fund firms rose from 1.62% of fund assets in 2023 to 1.77% in 2024, surpassing their peak from 2012.

-- Meanwhile, performance fees dropped to 17.3% in 2024 from 17.7% the prior year. Nearly half of investors in hedge funds want fund managers to forgo charging performance fees until returns exceed a preset threshold, but only 30% of managers currently offer that kind of arrangement, known in the industry as a hurdle.

This item is part of a Wall Street Journal live coverage event. The full stream can be found by searching P/WSJL (WSJ Live Coverage).

(END) Dow Jones Newswires

February 07, 2025 14:45 ET (19:45 GMT)

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