How hedge funds can help you invest like the 1%
Replicating the approach used by hedge funds means you too can invest like the 1%. Here's how
Hedge funds that focus on picking stocks have had a fantastic start to the year. So-called long-short equity hedge funds returned around 6.7% for the year to 14 April, before the rally in equity markets that took place on news of the ceasefire in the Middle East, according to a report compiled by Goldman Sachs. The MSCI World index gained 4.3% for and the S&P 500 3.9%.
Long-short equity hedge funds try to beat the market by taking long positions in their favourite firms and going short or betting against the companies they believe are overvalued. This is just one part of the $5.2 trillion hedge-fund sector. Because they are aimed at high-net-worth and professional investors, hedge funds can invest wherever they want and in whatever they wish to, as long as they have their investors' permission. The Andurand Commodities Discretionary Enhanced fund, for example, an energy-focused hedge fund managed by legendary oil trader Pierre Andurand, returned 31% in the first quarter of 2026, driven by bullish bets on oil markets (although it went on to lose 51% in April). Another fund, Point72 Asset Management, is what is known as a “multi-strategy” hedge fund, and trades everything from oil to interest rates, currencies and equities to earn a return. It ended March up nearly 4% despite the volatility in global markets.
The global hedge-fund industry attracted $89.3 billion in new capital over the six months to the end of March, the highest two-quarter period of inflows since 2007. “Macro” funds have been particularly popular with investors, according to the latest HFR Global Hedge Fund Industry report. These funds seek to profit from movements in financial markets driven by political or economic events and invest across all asset classes, using leverage to boost returns. Major macro firms include Bridgewater Associates, Brevan Howard, Caxton Associates and Rokos. HFR's benchmark index for these funds, the HFRI Macro (Total), returned 4.9% in the first quarter, outperforming the MSCI World index by 8.5%. Meanwhile, HFRI's fixed-income index, the HFRI Relative Value (Total), added 1.4% in the quarter, around 2.6% better than the -1.2% return for the BofA Global Broad Market Corporate bond index and 3.3% more than a broad index of UK gilts.
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Hedge funds are not as exotic as they look
These returns illustrate the key reason to hold hedge funds in a portfolio: they can help fund managers and investors to reduce volatility by gaining exposure to assets they may not have the expertise or resources to trade themselves. However, most hedge funds require a minimum investment of around £100,000. Some won't talk to you unless you're willing to put up millions. What's more, to make the most of these vehicles investors tend to hold a portfolio of funds, each with a different focus. So, adequately to take advantage of the sector, investors need several million pounds. That's why the hedge funds tend to be off-limits to all but the wealthiest individual investors.
That said, UK investors do have some options. There are a number of hedge fund structured as investment trusts, as well as one publicly listed hedge fund based in London and traded on the London Stock Exchange.
In our globally interconnected financial markets, there are also options on other exchanges around the world that could be worth considering for those seeking to diversify their portfolios.
Hedge funds are often portrayed as exotic and complex, but in reality, they are very similar to the funds available to the average retail investor. A hedge fund is simply a fund formed by a group of private investors with the aim of generating a return on their investment over a set period. They often seek to achieve a positive absolute return, rather than outperform a benchmark – that is, they seek to achieve a positive return regardless of whether the broader market is rising or falling.
However, because hedge funds tend to focus on high-net-worth investors and institutions (such as pension funds), the regulations governing them are much more flexible. It's assumed that the institutions and wealthy individuals who decide to invest in hedge funds have the skills to evaluate the proposition themselves, so hedge-fund managers have much more flexibility around where they can invest and how they can invest.
There's also no obligation for hedge-fund managers to report what they hold and why they hold it. Some managers may decide to own just a handful of different assets and update investors once a year. Others may hold thousands of different investments, with teams of traders buying and selling positions every minute. Hedge funds also tend to have higher fees than the active funds available to the mass market. It's common for managers to adopt a “two and 20” structure, with a management fee of 2% a year and a performance fee of 20% of any profit, although managers will offer better terms for more important customers. While the additional fees do undoubtedly have an impact on returns over time, it ensures the managers, who often own a big stake in the fund themselves, have a strong incentive to achieve the best returns, and this level of incentive structure is something you don't usually see with active funds aimed at the mass market.
Hedge funds also frequently restrict their investors from withdrawing money. This can be helpful when using esoteric or illiquid investment strategies and managers don't want to have to deal with a large number of redemption requests in any particular period, which may force them to sell assets at a bad time. In this respect, hedge funds have a lot in common with investment trusts. Investment trusts have a fixed capital base; hedge funds can lock in their capital for a period. Some funds will require investors to commit for five years when they make an initial investment. Others may require them to submit redemption requests quarterly rather than daily. They also often reserve the right to “gate” withdrawals, or prevent investors from accessing their cash if the manager believes doing so would have a detrimental impact on investment returns.
Bill Hwang, founder of Archegos Capital Management
Just like investment trusts, hedge funds can and do use leverage, or borrowed money, to enhance returns. However, this has led to disastrous outcomes in the past, when managers have borrowed too much, too quickly. One of the most notable recent examples was Bill Hwang's Archegos Capital, which imploded after borrowing $160 billion against just $20 billion in capital. The funds collapse wiped out Hwang's $20bn net worth overnight and ultimately led to the collapse of global investment bank Credit Suisse. In another example, in the first quarter of 2021, Melvin Capital, run by Gabe Plotkin, lost about $4.5 billion, or 49% of its assets, in a few weeks, betting against GameStop using borrowed funds. The fund survived only after receiving a $2.5 billion bailout, although it closed for good a year later.
Hedge fund managers are only human
Hedge funds have attracted plenty of criticism over the years, mainly on the issue of fees. A study published in February 2020, “A Bias-Free Assessment Of The Hedge Fund Industry”, found that between 2013 and 2019 hedge-fund managers created up to $600 billion in value added, before fees. Net of fees, the figure was significantly lower. In fact, one study of 22 years' worth of hedge fund data, also published in 2020 (“The Performance Of Hedge Fund Performance Fees”), found that fees consumed 64% of the gross returns on investors' capital over the long run.
Hedge-fund managers would, of course, argue that they deserve higher fees because they outperform the market. And that is true to a certain extent. But they are also only human. Another study published in May 2011, “Higher Risk, Lower Returns: What Hedge Fund Investors Really Earn”, found that although a hedge-fund portfolio's buy-and-hold return between 1980 and 2008 came in at 12.6%, higher than the S&P 500's total return of 10.9% over the same period, the dollar-weighted annual return, accounting for investors' inflows and outflows, was just 6% a year. This shows that, although most hedge-fund investors are far richer than the average investor, they're still subject to psychological biases. Indeed, Morningstar's latest Mind the Gap report revealed that the average investor lost 1.2 percentage points annually over the past decade due to poor timing of purchases and sales. Multiple studies have reached the same conclusion.
Focusing on this performance in isolation misses the point, however. Hedge funds and alternative strategies should only be used as part of a portfolio to provide diversification and help smooth long-term returns. Hedge fund Universa Investments is one of the best examples of what a hedge fund or alternative strategy can provide. Universa specialises in risk mitigation against “black swan” events – that is, unpredictable and high-impact drivers of market volatility. To this end, it employs a bespoke combination of credit-default swaps (a form of credit insurance on corporate debt), stock options and other derivatives to bet on market movements. The fund is highly secretive, but Universa reportedly manages $20 billion and posted a 100% return on capital when Donald Trump unveiled his sweeping tariffs last April. It reportedly earned 4,000% in March 2020 when the pandemic broke out.
Universa is far from the only fund that has used this approach to make enormous profits. Bill Ackman's Pershing Square hedge fund earned $2.6 billion during the pandemic after paying $26 million to acquire a portfolio of credit-default swaps, which then soared in value by more than 10,000%. These trades don't come around very often, which is why it can pay to have a manager focused on finding opportunities.
Wealthy individuals and companies that invest in hedge funds will do so as part of a broadly diversified portfolio. This helps reduce the risk of volatility, erosion of returns by fees and any individual hedge-fund blow-up. Insurers typically allocate between 3% and 10% of their funds to hedge funds and other alternative assets, while public pension funds allocate up to 12% on average, according to figures compiled by Goldman Sachs and the French bank BNP Paribas. University endowments can take larger positions, primarily because they have a much longer-term focus.
Endowments allocate 15%-40% of their assets on average to long-short, event-driven and emerging-market hedge funds. Family offices, which can also take a longer-term view, also tend to have a higher allocation, although typically capped at around 25% on average, according to research.
One of the world's most active hedge-fund investors is the Canada Pension Plan Investment Board (CPPIB). This $714 billion fund has been investing in and backing new hedge-fund managers for years and it's accumulated a $76 billion portfolio of internally and externally managed funds. According to the fund's 2025 annual report, its strategies have delivered $15.6 billion above its benchmark in net added value over the past five years, mainly due to external fund allocations.
Hedge funds for the average investor to buy
While most hedge funds are off-limits to the average investor, the UK is actually uniquely positioned in having a number of publicly traded hedge funds available for individuals to buy and sell on the London Stock Exchange. Two of these are in the FTSE 100: Pershing Square Holdings (LSE: PSH), and the world's largest publicly traded hedge fund, Man Group (LSE: EMG).
Pershing Square was listed in London in 2017 and is run by Pershing Square Capital Management, founded in 2004 by Bill Ackman. It's not an exact copy of the parent firm's fund, but rather a selection of the best ideas. The fund aims to hold eight to 12 core holdings (although a total of 15 holdings are currently listed), bundled up within an investment-trust structure. That means it's available to smaller investors and has the added benefit of an independent board of directors that provides oversight and ensures their representation. The trust has a typical hedge-fund fee structure, with an annual management fee of 1.5% and a performance fee of 16%. Management would argue that the returns have more than justified the high fees. Since its inception in 2012, the fund has produced an annualised return in terms of net asset value of 11.8% compared with 6.5% for the FTSE 100 in US dollar terms. Holdings currently include Uber, Amazon, Google and Meta.
Man Group runs a range of investment products operating under a variety of investment strategies. Its main options come under its computer-driven trading arm AHL, and they've performed particularly well this year. In the three months to the end of March, its AHL Alpha fund added 5.7% and AHL Dimension returned 5.6%. Man Strategies 1783 notched up a 3.8% return. Thanks to this positive performance in a quarter defined by volatility, assets reached $228.7 billion in the three months through March, up from $227.6 billion at the end of 2025. Buying shares in Man Group won't give investors direct access to its underlying strategies, but will provide exposure to the firm's income stream. For the year to 24 April, shares in the hedge fund returned 11.6% and over the past five years produced a total annualised return of 13.8%.
Another London-based option for investors is BH Macro (LSE: BHMG). This investment trust has just one investment: units of the Brevan Howard Master Fund, one of the world's largest and most successful macro hedge funds. This trust is designed to provide investors with a strategy to diversify away from equity markets. Since the first half of 2007, there have been 20 significant market drawdowns where the US S&P 500 index has fallen by 5% or more. In 17 of these 20 periods, BH Macro's net asset value actually increased. In October 2008, for example, when the S&P 500 fell by more than 15%, the fund's net asset value rose by several percentage points. The fund, with its 150 portfolio managers and traders, has achieved an annualised return of 8.5% since inception, with less volatility than in broader equity markets.
Another option is Tetragon Financial (LSE: TFGS). This trust owns a portfolio of private businesses, hedge funds, credit, real estate and bank loans. Its net asset value has risen 612% since its inception in early 2007, nearly double the MSCI All Country World index. It charges a performance fee of 25% and an annual management fee of 1.5%.
Blackstone (NYSE: BX) is one of the world's largest publicly traded asset managers. It was founded in 1985 and started life as a private equity and mergers and acquisitions shop and has since expanded into real estate, private credit, fund management and even hedge funds. The $1 trillion asset manager is leading the charge in bringing hedge funds to high-net-worth individuals with the Blackstone Multi-Strategy Hedge Fund, known as BXHF, which plans to start trading this year. According to Bloomberg, the fund will invest about 30% of its assets in other hedge funds as well as make its own investments. It will charge a 1.25% management fee and take a cut of 12.5% of profits once it earns at least a 5% return. Blackstone could be one of the best ways to invest in the booming market for alternative assets, offering diversification across multiple sectors.
There are limited options for investing directly in hedge funds and hedge-fund managers, but investors can use a selection of investment trusts to build exposure to alternative assets and diversify their portfolio themselves. For example, BioPharma Credit (LSE: BPCR), an offshoot of Pharmakon Advisors, one of the world's largest specialist biotechnology funds, lends directly to biotechnology companies and yields 7.5%. The trust has a near-spotless lending record.
Elsewhere, the TwentyFour Income Fund (LSE: TFIF) and TwentyFour Select Monthly Income (LSE: SMIF) focus on trading collateralised loan obligations and mortgage-backed securities to generate a high single-digit annual dividend for investors. These funds are highly specialised vehicles, but can help diversify portfolios.
On the credit side, there's also CVC Income and Growth (LSE: CVCG). This investment trust is managed by the private-equity giant CVC and holds a portfolio of senior secured loans acquired for yield and value. Once again, the trust could provide investors with diversification during turbulent times.
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