Funds of Hedge Funds Reach Record Asset Levels, Surpassing 2007 Peak
After a period of significant decline, the funds of hedge funds sector has achieved a remarkable milestone. According to data released by Hedge Fund Research, these investment vehicles now manage over $800 billion, marking the highest level ever recorded. This figure surpasses the previous peak of $799 billion, which was reached in 2007, signaling a robust resurgence for an industry once considered to be in serious trouble. The recovery demonstrates a renewed confidence in the strategy of diversifying investments across multiple hedge funds.
The industry’s journey has been fraught with challenges. The combined impact of the 2008 financial crisis and the exposure to Bernie Madoff’s Ponzi scheme severely impacted the sector, leading to widespread liquidations and a significant reduction in the number of active funds. It took nearly two decades for the industry to recover and surpass its pre-crisis asset base, highlighting the depth of the initial setback. As of the end of 2025, funds of hedge funds are now overseeing $818 billion in assets, a testament to their resilience and adaptability.
Strong Performance Drives Asset Growth
The recent surge in assets isn't solely attributable to renewed investor interest; it's also fueled by strong performance within the sector. The average fund of funds generated a return of 10.4% in 2025, representing the highest annual return since 2009. Ken Heinz, president of Chicago-based Hedge Fund Research, attributes this growth to a combination of factors, including favorable market conditions and evolving investment strategies. He noted that broader industry trends are also contributing to the positive momentum.
A key development influencing the landscape is the increased adoption of separately managed accounts (SMAs). These accounts provide investors with greater control over the selection and oversight of external fund managers. Firms like Millennium, led by billionaire Izzy Englander, have strategically utilized SMAs to access top-tier investment talent beyond their internal teams. A report from With Intelligence last summer revealed that multistrategy funds have allocated capital to over 100 external funds, further demonstrating the shift towards more flexible and targeted investment approaches.
Evolution of Funds of Funds and Industry Shifts
The role of funds of funds has undergone a significant transformation. Previously, they and wealthy family offices held a more substantial share of hedge fund assets. However, the 2008 crisis prompted many investors to liquidate their holdings, regardless of fund performance, leading to a search for alternative capital sources. Consequently, institutional investors, such as pension funds, endowments, sovereign wealth funds, and foundations, now dominate the $5.2 trillion hedge fund industry.
Despite this shift, the diversification benefits offered by funds of funds remain attractive, particularly within the realm of multistrategy hedge funds. The substantial growth in assets managed by prominent firms like Millennium, Citadel, Point72, and Balyasny underscores this renewed interest. Heinz anticipates that this trend will continue to bolster the fund-of-funds sector as these larger programs reach capacity. He explained that some of the largest multimanager programs have limited availability or high minimum investment requirements, driving investors towards funds of funds as an alternative.
The lasting impact of the 2008 exodus is still evident. In 2007, nearly 2,500 funds of hedge funds were operating; by the end of 2025, that number had decreased to fewer than 1,000, reflecting the industry's consolidation and restructuring following the financial turmoil.
