Why Emerging Hedge Fund Managers Shone in 2024

A Volatile Year Rewarding Agility

2024 was a roller-coaster in the markets – and it turned into a proving ground for nimble hedge fund managers. Hedge funds broadly delivered roughly 10–11% average returns in 2024, a comfortable double-digit gain that far outpaced their 2023 performance. In fact, by November the industry was up 10.7% (versus just 5.7% over the same period in 2023). What drove this success? In a word: volatility. Chaotic markets, rapid-fire central bank policy shifts, and even a tight U.S. election race created exactly the kind of dislocations where hedge funds thrive. As one prime brokerage report noted, 2024’s turbulence “helped the performance of global hedge funds”, lifting average returns to about 11%.

Notably, long/short equity funds had their best year since 2020 amid these wild market swings. And some managers knocked it out of the park – several portfolio managers scored above 50% gains for the year. This kind of banner performance underscored a theme my fellow CIOs and I kept coming back to in 2024: agility wins. The emerging managers – those up-and-coming hedge fund firms often running smaller pools of capital – were among the most agile of all, and it showed in their results.

Emerging Managers Outperform and Attract Assets

If you looked at which hedge funds grew the most last year, the emerging managers were one of the leaders of the pack. An analysis of SEC filings found that “smaller emerging managers” increased their assets under management by an average of 16.3% in 2024 – one of the highest growth rates among all manager categories. This surge reflects both investment performance and new allocations. It even eclipsed the industry’s overall asset growth (~9.8% AUM increase to $4.51 trillion). In short, many of these up-and-comers not only posted great returns but also saw inflows as investors took notice.

From my vantage point, this makes perfect sense. Smaller hedge funds can pursue pure alpha in ways large mega-funds sometimes can’t. With fewer dollars to deploy, an emerging manager can nimbly trade in and out of niche opportunities – whether it’s a mispriced mid-cap stock or a timely macro trade – without moving the market. There’s long been a belief that newer, hungry managers can “punch above their weight,” and 2024 delivered real evidence of that. Hedge funds overall proved their worth as diversifiers and risk mitigators (while still delivering double-digit gains), and emerging managers contributed heavily to that industry success.

It’s telling that a number of successful portfolio managers left large firms to manage smaller portfolios. By early 2024, industry observers were tracking a bumper crop of roughly 40 new hedge fund launches by star portfolio managers spinning out of multi-billion-dollar firms. Many of these elite traders chose to start fresh, building their own agile firms. That infusion of top talent into the emerging manager universe brought fresh ideas and likely helped boost 2024 performance for the cohort as a whole.

Allocators Pivot Toward Nimble Funds

Perhaps the biggest endorsement of emerging hedge funds’ success in 2024 came from institutional allocators themselves. As CIOs at pensions, endowments, and foundations, many of us are increasingly channeling capital to these nimble managers. Recent industry surveys back this up: More than two-thirds of participating investors are open to allocating to emerging hedge funds with under $100 million AUM. In fact, investors were more likely to have made their latest hedge fund allocation to a new/emerging manager in 2024 than in 2022. This is a shift in sentiment. It shows that big allocators are actively seeking fresh sources of alpha and are willing to back smaller, less-proven funds to get it.

My peers often cite performance and alignment as driving this shift. After all, if a nimble fund is putting up strong numbers and managing downside risk in volatile markets, it earns a spot on our radar. A 2025 industry outlook noted that 36% of institutional hedge fund allocators plan to commit new capital (and 43% to invest opportunistically) going forward – and much of that won’t necessarily go to the usual mega-funds. There’s a growing hunger for specialized strategies and emerging talent. In one prime broker report, about 40% of investors looking to switch managers said they’d seek a smaller hedge fund (versus only 25% who wanted a larger one). The rationale? Some feel smaller managers are more responsive and better at managing risk; others simply see a chance for higher alpha in managers that aren’t running hundreds of billions.

It’s also worth noting that hedge funds regained net inflows in 2024 (about $10.5 billion industry-wide) after years of outflows, thanks to their solid performance. That suggests institutions broadly are renewing their commitment to hedge funds as an asset class. And within that class, emerging managers are getting an increasing share of attention. A decade ago, a giant public pension might have written off sub-$100M funds as too small or operationally risky; today, many of those same pensions are carving out “emerging manager” allocations to capture the next generation of outperformers.

Alignment and Innovation as Key Advantages

One reason emerging hedge fund managers resonate with institutional investors is alignment of interests. These firms are often founder-led, with the portfolio manager’s own net worth heavily invested alongside clients. There’s no complacency when the team is small and every basis point of performance counts. As a result, we often see fee structures and terms from emerging funds that are very investor-friendly. For example, a global survey in 2024 found that the average management and performance fees at emerging hedge funds are well below the traditional “2 and 20” model. Managers are competing to attract capital, so they’re more willing to offer lower fees and hurdle rates, founder share classes, or longer lock-ups that align with long-term investor goals. This fee competitiveness directly contributes to better net returns for allocators.

Emerging managers also run lean, efficient operations. Many embraced the cost discipline learned during the pandemic era, finding ways to do more with less overhead. By keeping non-investment expenses low, they can breakeven at smaller asset bases, which in turn lets them focus on performance rather than asset gathering. As Tom Kehoe of AIMA observed, despite facing higher relative costs and fee pressure, these next-gen firms “continue to stand strong, attract investors and expertly manage expenses to stay ahead”. That operational grit and focus on the core business of investing gives allocators confidence that a small fund can be institutionally viable.

Another edge for emerging managers is innovation. Unencumbered by legacy processes, many of these funds deploy cutting-edge strategies and technologies. It’s not unusual to see an emerging manager fusing quantitative models with discretionary insight – the classic quant-discretionary hybrid approach – to adapt to fast-changing markets. For instance, some portfolio managers leverage machine learning to scan for patterns but still rely on human judgment for final trade decisions, marrying the best of man and machine. We also see sector specialists launching with a twist: a tech-focused fund might incorporate alternative data and AI in its stock selection, or a macro startup might use systematic signals to inform big-picture trades. In an industry where multi-strategy platforms are increasingly king, even those giants are feeding the innovation loop by seeding external emerging teams (top multi-strat firms allocated roughly $20 billion to over 50 third-party managers in the first half of 2024 alone). This means new ideas get fast funding if they’re good – and investors benefit from that creativity. The bottom line is that emerging hedge funds tend to be labs of innovation, whether in how they trade or how they structure their funds, which can translate into uncorrelated returns for us as allocators.

Strategy Drivers Behind 2024 Performance

Drilling down, several strategy-level drivers explain why hedge fund emerging managers fared so well in 2024:

• Savvy Sector Rotation: Equity-focused emerging managers showed a talent for being in the right sectors at the right time. Tech stocks staged a huge comeback in 2024, and many nimble funds rode that wave – one tech‐oriented long/short fund finished the year up nearly 59%. At the same time, they avoided laggard areas; energy trades actually detracted from industry returns on the year. By rotating capital into the winners (e.g. AI and growth sectors) and out of losers (e.g. fading energy trades), emerging hedge funds generated alpha via stock selection and timing that larger, less agile peers struggled to match.

• Capitalizing on Macro Volatility: 2024’s macroeconomic swings – from rapid central bank rate changes to currency and yield fluctuations – created a rich opportunity set. Macro-focused emerging managers in particular seized the day. Volatility in rates and FX meant big trading gains for those who anticipated policy moves correctly. One macro fund notched a 52% gain by year-end 2024 trading across equities, bonds, currencies, and credit in both emerging and developed markets. Across the board, hedge funds benefited from these chaotic macro conditions, but smaller managers were in a position to quickly reposition portfolios as inflation data or Fed speak surprised markets.

• Exploiting Market Dislocations: Periods of stress and dislocation – whether in credit spreads, equity volatility, or commodities – were another boon. When parts of the market temporarily “broke” from their fundamentals, emerging managers were often first to dive in with targeted trades. For example, as bond yields spiked to multi-year highs, relative value and event-driven strategies were able to profit from mispricings and widening spreads. Industry consultants noted that many relative value hedge funds finished the year strong by profiting off rising bond yields, which created unusual pricing quirks across the yield curve. Event-driven managers likewise jumped on special situations (like merger arbitrage spreads or distressed debt opportunities) that appeared during the year’s uncertainty. These kinds of opportunistic trades – born from temporary market inefficiencies – are where smaller, more focused funds should be in a position to differentiate themselves. 2024 offered plenty of such dislocations, and emerging managers didn’t let them go to waste.

• Quant-Discretionary Hybrids & Innovation: A number of 2024’s emerging standouts employed hybrid strategies blending quant techniques with human discretion. This might mean a quantamental equity fund that uses statistical models to screen thousands of stocks, but then a portfolio manager handpicks the highest-conviction ideas from that screen. Or a global tactical fund that uses algorithmic trend-following for speed but has a human overlay to adjust for breaking news and regime changes. These approaches tended to perform well in 2024’s environment because they combined data-driven precision with flexibility. We saw hybrid quant-discretionary funds navigate regime shifts (like the early-year growth stock rally giving way to an autumn bond yield surge) more smoothly than one-size-fits-all strategies. Innovation wasn’t just in technology, but also in trade structuring – some emerging managers devised creative hedges and cross-asset plays. The net effect for some was uncorrelated alpha. As an allocator, I find this particularly attractive: strategies that don’t rely purely on a single style, but rather adapt and evolve, can provide a more steady return profile.

A CIO’s Takeaway

Looking back on 2024, it’s clear to me that hedge fund emerging managers earned their place at the table. They delivered on performance when it counted, demonstrated real expertise in navigating a choppy macro landscape, and aligned well with what institutional investors like us are looking for (strong alpha, reasonable fees, and differentiated strategies). No one is suggesting we abandon our longstanding managers – but the year showed why a balanced allocation makes sense. The big, established funds can generally provide stability and relatively steady returns, while some emerging managers generated nimble alpha and outperformance.

Perhaps most encouraging is the validation of the business case for emerging managers. Even with higher hurdles and due diligence requirements, these managers “continue to stand strong” and attract capital by proving their value. Allocators are recognizing that some of tomorrow’s top performers can be found among today’s smaller funds. As one industry study found, more than 85% of investors now source new hedge fund managers via their own networks or prime broker cap-intro teams – meaning the search for the next great manager is more intense than ever.

For us U.S.-based CIOs in charge of pension, endowment, or foundation assets, the lesson of 2024 is to stay open-minded and proactive in this space. The hedge fund industry as a whole is expanding again (assets climbed back above $4.5 trillion), but the real excitement lies in how that growth is happening – as I have argued –  through innovation, new blood, and yes, the strong results of emerging managers who are hungry to make their mark. By allocating wisely to these managers, we not only tap into fresh return streams, but we also help cultivate the next generation of industry leaders. And from where I sit, that’s a win-win scenario that 2024 made hard to ignore.

Sources:

1. Hedge funds score double-digit returns in 2024 | Reuters
2. Investors seek to switch hedge funds, citing risk, performance and size, says IG Prime | Reuters
3. Standing Strong: The Next Generation of Hedge Funds · The Hedge Fund Journal
4. The Managers With the Best Growth Last Year
5. Hedge fund industry reaches $4.5 trillion in 2024 | Reuters
6. Hedge funds return 10% globally in 2024 while proving diversification worth, says Preqin | Alternative Investment News
7. High-profile hedge fund managers line up launches for 2024 | Reuters
8. Pension Funds & Geopolitics to Drive Hedge Funds Above $5T by 2030
9. Maryland State Retirement and Pension System Board of Trustees Demonstrates its Commitment to Emerging Managers by Formalizing the Terra Maria Program

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