By Nell Mackenzie, Carolina Mandl and Summer Zhen
LONDON (Reuters) - Next (LON:NXT) year's top pick for hedge fund strategies is so-called macro, with U.S. President-elect Donald Trump centre-stage as investors bet on how global policy decisions will impact economic conditions and play out in financial markets.
Hedge fund returns benefited this year from wild market swings sparked by politics such as November's U.S. election, and twists in monetary policy such as Bank of Japan rate hikes.
And investors are readying for more volatility in the year ahead, seven hedge fund investors and portfolio managers told Reuters and a recent survey showed.
" Macro (BCBA:BMAm) seems interesting now given a more turbulent political backdrop and what it means for both fiscal and monetary policy," said hedge fund investor Craig Bergstrom, chief investment officer at Corbin Capital Partners (WA:CPAP).
U.S. tariff hikes under a new Trump administration could deal the global economy a fresh blow, further weakening China's yuan and the euro, while adding to inflationary pressures that slow the Federal Reserve's ability to cut rates.
Although hedge funds specialising in cryptocurrency trounced other strategies in 2024, with data provider Preqin estimating a 24.5% annualised return, investors are less convinced for 2025.
Macro ranked first and crypto last in a list of hedge fund strategies for 239 investment firms surveyed by Societe Generale (OTC:SCGLY) in November.
Around two fifths of those surveyed aimed to invest in macro, the client note seen by Reuters said, adding that interest in government bond trading had fallen. Meanwhile, funds trading commodities and equities ranked second and third.
Jordan Brooks, co-head of the Macro Strategies Group at investment management firm AQR agreed that sovereign bonds were becoming less of a key investment theme.
"Inflation is now more balanced. From here, we think things are less certain across the board," said Brooks, adding that the $7.5 trillion a day currencies market would be in focus.
CRYPTO? NOT YET
Although Trump has embraced digital assets, promising friendly regulation and to accumulate a stockpile of bitcoin, some hedge fund investors are not convinced.
"We haven't seen a lot of institutional investor demand on the solutions side for crypto trading strategies," said Carol Ward, head of solutions at the $175 billion Man Group (LON:EMG).
Benjamin Low, a senior investment director at Cambridge Associates, said some Asia-based funds had explored small-scaled crypto investing, but nothing had come of it yet.
Crypto might serve as a good diversifier that trades differently to broader markets, said Low, whose advisory firm links hedge funds with investors and undertakes fund manager selection and allocation for clients.
"But the volatility is so high, when you talk crypto, what are you trading, is it just the cryptocurrencies, are you buying into companies or equities?" said Low.
"The definition is so broad and wide that it might invite more questions from existing investors," he added.
Nevertheless, attitudes are changing and many funds have updated their investor documents in the last couple of years to allow them to include crypto exposure, said Edo Rulli, CIO of hedge fund solutions at UBS Asset Management.
"Larger exposures in non-specialist hedge funds are not there yet. Digital asset exchanges are not regulated and some carry reputational and fraud risk," said Rulli, adding that some hedge funds have found ways to trade crypto indirectly.
NextGen Digital Venture, a Hong Kong-based hedge fund specializing in crypto stocks, jumped 116% this year through November, thanks to its exposure to stocks like Coinbase (NASDAQ:COIN), MicroStrategy, and Marathon Digital (NASDAQ:MARA) Holdings.
Founder Jason Huang is preparing his second crypto-focused fund and while optimistic, cautioned that bitcoin could reach a cyclical peak next year.
Meanwhile, hedge funds including Millennium Management, Capula Management and Tudor Investment raised their exposure to U.S. spot bitcoin ETFs in the third quarter, filings showed.
And multi-strategy funds have bought the convertible bonds of software company MicroStrategy, the largest corporate holder of bitcoin, whose shares have soared nearly 500% this year.
SkyBridge founder Anthony Scaramucci said it should take a while for crypto to lure more big allocators, as potential regulatory discussions have just started.
"We're creating now a regulatory runway. Big institutions, endowments, big enterprises, they don't want to get fired. They're sitting on top of piles of money, and it's their job to take measured risk," he said.
(This story has been refiled to capitalise the letter 'B' in 'SkyBridge,' in paragraph 24)