The hedge fund industry is closing out 2025 on a high note, with managers across nearly every strategy posting positive returns. But the year's biggest surprise isn't the overall performance—it's who delivered it. The smallest funds, those managing less than $100 million in assets, led the pack with a stunning 14.6% return, according to data from industry research firm PivotalPath.

The outperformance challenges the long-held assumption that bigger is better in the hedge fund world, where scale supposedly provides advantages in research, technology, and access to deals.

The Numbers Behind the Comeback

Through November 2025, the hedge fund industry as a whole gained 10.8%, according to PivotalPath's Composite Index, which tracks 1,100 managers across all strategies and geographies. That performance puts the industry on pace to eclipse its 2024 returns and marks one of the strongest years since the post-financial-crisis era.

But drill down into the data, and a clear hierarchy emerges based on fund size:

  • Under $100 million: 14.6% return
  • $100 million to $500 million: 12.3% return
  • $500 million to $1 billion: 10.9% return
  • Over $1 billion: 9.4% return

The pattern is striking: the smaller the fund, the better the performance.

Why Small Funds Won

Several factors explain the small fund advantage in 2025:

Agility in Volatile Markets

The year was defined by sharp rotations between sectors and asset classes. Small funds, unburdened by the market impact that comes with managing billions, could pivot quickly when opportunities arose. A $50 million fund can enter and exit positions that would be impossible for a $10 billion behemoth.

Concentrated Bets

Large funds often diversify to the point of indexing, especially as institutional investors demand lower volatility. Small funds maintained the conviction-driven portfolios that can generate outsized returns when positions work.

The Healthcare Trade

Equity long/short funds emerged as the year's top-performing strategy, with healthcare-focused managers leading the way. Many of the best healthcare specialists operate smaller, specialized funds that can analyze biotech pipelines and FDA decisions with depth that generalist mega-funds cannot match.

Winning Strategies and Standout Performers

Beyond the small fund story, several strategies distinguished themselves:

  • Equity long/short: The year's top-performing category, benefiting from the AI boom and healthcare M&A
  • Global macro: PivotalPath's Global Macro Index gained 8.6%, as managers capitalized on currency and interest rate divergences between the U.S. and rest of world
  • Multi-strategy: The industry's largest funds, while underperforming smaller peers, still delivered consistent mid-to-high single-digit returns

Individual standouts included EDL Capital (29.86%), a global macro fund that profited from bullish European currency bets; Pershing Square (23.2%), Bill Ackman's concentrated equity fund; and Two Seas Global Fund (29.5%).

Industry Capital Hits Record Highs

Despite the small fund outperformance, money continues flowing to the industry giants. Total global hedge fund capital rose for an eighth consecutive quarter in Q3 2025, reaching a record $4.98 trillion.

SS&C GlobeOp's Capital Movement Index for December 2025 registered 0.43%, indicating continued positive inflows as the year closes. Institutional investors—endowments, family offices, and public pension plans—renewed commitments to multi-strategy and long/short equity funds.

The Crypto Disappointment

Not every strategy thrived. Directional cryptocurrency hedge funds, which entered 2025 expecting a breakout year after regulatory tailwinds, instead suffered losses. While Bitcoin posted respectable gains, the broader crypto market's volatility and year-end tax selling crushed funds that relied on momentum strategies.

Only market-neutral crypto funds—those hedging long and short positions—posted gains in the space.

What It Means for Investors

The 2025 results carry important implications for hedge fund allocators:

Don't Dismiss Emerging Managers

Institutional investors often impose minimum AUM requirements of $500 million or more. This year's data suggests they may be leaving returns on the table by ignoring smaller, nimbler competitors.

Strategy Selection Matters More Than Ever

The dispersion between winners and losers remains wide. A blanket allocation to "hedge funds" misses the nuance that healthcare long/short delivered vastly different results than systematic macro or crypto.

The Fee Debate Continues

With public markets delivering strong returns, the traditional 2-and-20 fee structure faces ongoing scrutiny. Funds that justify their fees with alpha generation will retain capital; those that merely ride beta will face redemptions.

The final industry performance figures for 2025 will be released in mid-January when December returns are aggregated.