The hedge fund industry capped 2025 with its best collective performance in at least five years, as volatile markets created the perfect conditions for sophisticated trading strategies to shine. Leading the charge was Bridgewater Associates, the world's largest hedge fund, whose Pure Alpha II fund delivered an extraordinary 34% return—its best year on record.

The results mark a stark turnaround for an industry that spent much of the past decade defending its existence against the relentless rise of low-cost index funds. In 2025, active management proved its worth when markets stopped going straight up.

The Winners' Circle

Bridgewater's performance stood out in a year of standout performances. The firm's flagship macro strategy, Pure Alpha II, capitalized on currency swings, bond market volatility, and commodity price movements that characterized 2025's turbulent trading environment.

But Bridgewater wasn't alone at the top of the leaderboard:

  • Melqart Opportunities Fund: Michel Massoud's event-driven strategy surged 45%, making it one of the year's best performers
  • D.E. Shaw Oculus: The quantitative giant's Oculus fund returned an estimated 28.2%
  • EDL Capital: The global macro fund returned 29.86%, with successful long positions in European currencies
  • Bill Ackman's Pershing Square: The activist investor's fund gained 23.2%
  • AQR Capital Management: The multistrategy fund returned 19.6%

The Mega-Fund Performance

Even the industry's largest players, which often struggle to generate alpha due to their size, posted respectable numbers. Ken Griffin's $72 billion Citadel gained 10.2% for the year, with its tactical trading fund advancing 18.6% and fundamental equity strategy returning 14.5%.

Izzy Englander's $83.5 billion Millennium finished up 10.5%, while D.E. Shaw's flagship Composite fund—one of the industry's largest multistrategy offerings—returned 18.5%.

"This was the year that reminded investors why they pay hedge fund fees. When markets are volatile and correlation breaks down, skilled managers can generate returns that justify their compensation."

— Industry observer on 2025's hedge fund performance

What Drove the Outperformance

Several factors combined to create an ideal environment for hedge fund strategies in 2025:

Trade Policy Volatility: President Trump's tariff announcements created sharp moves in currencies, commodities, and equity sectors—exactly the kind of dislocations that macro and tactical traders exploit.

Central Bank Divergence: Different monetary policy paths at the Federal Reserve, European Central Bank, and Bank of Japan created opportunities in fixed income and currency markets.

Precious Metals Rally: Gold's 65% surge and silver's 142% gain rewarded funds positioned in commodities.

AI-Driven Stock Selection: The continued AI boom created winners and losers within the technology sector, allowing stock pickers to generate alpha through careful selection.

Strategy Performance by Category

According to data from Citco, multistrategy funds led the pack with average returns of 19.3%. Equity-focused funds returned an average of 17.1%, while global macro strategies averaged 15.8%.

Not every approach succeeded. Commodities funds struggled with an average loss of 1.5%, and event-driven strategies barely broke even at 0.4%—victims of the unpredictable policy environment that made deal outcomes difficult to forecast.

PivotalPath's Equity Sector Index rose 22.7% through November, reflecting the strong performance of managers who successfully navigated the AI-driven rotation within technology stocks.

Still Trailing the S&P 500

Despite the strong absolute returns, most hedge funds still underperformed the S&P 500's 16.4% gain for the year. This persistent gap has been the industry's Achilles heel for over a decade, driving assets to passive strategies that simply match the index at a fraction of the cost.

Hedge fund defenders argue the comparison is misleading. Most hedge funds aim to generate returns with lower volatility and less correlation to stocks—a different objective than simply beating the S&P 500. In years when the market declines, hedge funds typically protect capital far better than index funds.

Looking Ahead to 2026

The conditions that benefited hedge funds in 2025—policy uncertainty, central bank divergence, and sector rotation—show no signs of abating. If anything, the Trump administration's second term promises continued volatility in trade policy, while the Federal Reserve's path remains uncertain.

For investors allocating to hedge funds, 2025 served as a reminder of why the industry exists. When skilled managers have volatility to trade, they can generate returns that justify their fees. The challenge is maintaining conviction during the inevitable stretches when markets are calmer and passive strategies dominate.

Bridgewater's record-breaking year also highlights the value of true diversification. While many investors piled into AI stocks, Ray Dalio's firm made its money in currencies, bonds, and commodities—assets that move independently of the tech trade that has dominated portfolios for the past two years.