Hedge Fund Trends 2026: Is the AI Bubble Bursting and Where Will Alpha Come from Next?

It's time to polish up our crystal ball and peek into the hedge fund trends of 2026 to see what exciting developments will dazzle us. The rear-view mirror offers a decidedly clearer view of things as the industry caps off a big year in new fund launches, the lowest rate of liquidations in recent years, highest inflows since 2007, and the strongest returns since 2017. The mythical $5 trillion AUM milestone became reality as the global trade power structure was being reshuffled. The eye-popping numbers correlated with a crackling equities market propped up by AI.ⁱ

Interest rates have dropped and inflation has persisted, so fund managers now focus their gaze on the second half of the 2020s. Hedge fund managers saw solid returns in 2025, with industry performance ranging from 10% to 11% through November with equity-focused funds leading returns, while macro and managed futures strategies also generated positive results.ⁱⁱ How will the hedge fund industry follow up a historic year as concerns about private credit risk, AI bubbles, and international strife temper our optimism?

5 observations for 2026

1. Hedge funds continue to explore novel ways to generate alpha

Physical commodities allocations are a sizzling trend that’s forecast to continue in 2026, as Citadel, Qube, Squarepoint, and more have already actively expanded in this space. Managers are zealous about physical commodities in 2026 despite the fact that returns in 2025 were disappointing at just over 2%.ⁱⁱⁱ Commodities trading are key assets of macro funds, which returned 11.5% through Q3, on track for its best annual return in 15 years.^iv

Despite the strong performance, hedge funds had to navigate a complex environment of geopolitical uncertainty and shifting investor preferences for more liquid and transparent vehicles. Half of allocators are “somewhat negative” about hedge fund managers entering private credit and other illiquid strategies, preferring them to remain within their established expertise. A further 14% hold very negative views. “The skill sets that produce alpha in liquid markets – speed, relative-value analysis, derivatives expertise – do not necessarily translate to the relationship-intensive, patient capital approach required in private lending.”^v Despite that, traditional hedge funds will continue to look at private credit opportunities — especially asset-based finance and secondaries.

To visualize this landscape, one might think of the 2025 hedge fund market as a high-speed race where the multi-strategy and macro cars traded the lead, while the smaller, lighter vehicles often found more agile paths through the traffic than the heavy giants.

2. Migration of staff and office openings in the Middle East

The Middle East is making progress toward becoming a major financial epicenter, and 2026 promises fertile ground. Hedge funds are establishing more senior non-investment footprints in MENA to evolve the local talent pools and generate local fund spin-outs in the region over time — all of which is benefiting the regional ecosystem. For example, Brevan Howard continues to push expansion in Abu Dhabi, now with 150 employees in the region.^vi The Abu Dhabi Global Market (ADGM) announced the need to expand the available office space to its financial services boom, which recorded a 42% year-on-year increase in registered entities in H1 2025.^vii Meanwhile, just 140 kilometers down highway E11, the number of hedge fund managers has more than doubled since the start of 2024, according to the Dubai International Financial Centre (DIFC).^viii

3. Multi-strategy hedge funds and pod shops spread their tentacles

Multi-strategy shops will keep getting bigger, as will the intensifying joust for talent — with the differentiated returns for those at the top end justifying their pass-through models. The multi-manager hedge fund structure has performed incredibly well over the past few years, continuing to attract intense interest from the investor base throughout 2025. We expect to see a continuation of higher profile PMs branching out to set up their own hedge funds. Citadel, Millennium Management, Viking Global Investors and Coatue Management were among those launching them in 2025.^ix

These pod shops will deploy more capital to external managers (e.g., Millennium and Qube), enabling them to access further talent pools and alpha opportunities. External managers are under the microscope, in terms of delivering strong performance within the constraints of their mandate and wider risk exposure oversight from the multi-strat. Moreover, smaller platforms are aping their larger counterparts, enabled by some bumping against their capacity. New multi-manager platforms could be launching to tap into the talent pool of existing smaller hedge funds with more niche strategies — with different pricing and fee structures to differentiate from the large pod shops. Despite the costs and regulatory scrutiny involved, the new launch environment should be buoyant. 

Funds and platforms also are prioritizing operational fundamentals to gain optimizations and stretch returns — especially with expansions into new asset classes and strategies. With increasing complexity, firms need efficiency and scale in satisfying regulatory reporting needs. Further, they want (and need) to be smarter in their capital allocations year-over-year and increase efficiency to take advantage of margin and collateral optimization and financing opportunities. As they continue to modernize data management, they see an opportunity in optimizing treasury operations so the function becomes a revenue generator instead of a cost center. Treasury can generate alpha by moving assets between internal accounts without external fees, performing internal crosses, and optimizing collateral use across managers, freeing up capacity.

4. AI in hedge funds 2026

When it comes to technology, however, everything will connect in some way to LLMs and agentic AI aspirations. Many C-Suite execs hope and expect AI to be 2026’s golden goose. Funds are not intending to take a knife to software engineering and operations teams. Instead, they are focused on empowerment and enablement and finding the use cases which derive the most value from AI at this stage. Firms are fiercely competing not only for investors and talent but also for AI leadership creds. They need technology firms to lead the way with domain experience in AI deployment.

Sensible AI governance and integration can help managers with their other tech debt payments: handling that greater breadth of asset classes with agility to outperform their peers; showing transparent attribution across strategies to assist with capital allocations; and validating fees paid and charged. Perhaps AI’s most immediate ROI will come in improving data management, facilitating data centralization and normalization, monitoring data cleanliness and integrity, and monetizing that clean data through analysis and insight.

5. Market impacting events and global macro strategies

Questions still outnumber answers in geopolitics and macroeconomics, starting with: Will there be a market correction, and what role might private credit defaults play? The only thing that is certain is change: Global market flows are being recalibrated and power dynamics are shifting. US investors are seeking overseas opportunities. While North American client flows dropped 34%, redemptions stayed flat in Europe as clients largely remained invested. In 2025, performance in emerging regional markets has been staggering. But, is 2026 the year the AI bubble bursts? Could tensions in other parts of the world escalate into market impacting events?

Macro hedge funds logged their best year since 2008, with swings in the price of currencies, commodities, and bonds creating positive momentum for traders.^x Of course, global macro strategies depend on liquid asset classes, not a characteristic of private market investments.