At the Half: Mid-Year Hedge Fund Industry Update
- The hedge fund industry delivered a strong performance in the first half of 2026, posting average gains of 7.0%—well above the 10-year average of 4.1%—and matching the strong momentum of late 2025. This performance was propelled by the AI supercycle, which accounted for nearly 85% of the gross alpha generated by fundamental equity long/short managers as they adeptly shifted their AI exposures over the past few years. Buoyed by these returns, allocator sentiment has reached record highs; 50% of surveyed allocators plan to increase their hedge fund exposure in the second half of 2026, driving broad-based capital inflows across every major strategy for the first time in 5 years.
Hedge Fund Performance
- Strong Start to the Year: The first half of 2026 continued the strong momentum of 2025, with hedge funds posting average gains of 7.0% in H1 2026. This is well above the 10-year average of 4.1%.
- Consistent Outperformance: H1 2026 marks the sixth consecutive half-year period where hedge fund performance has exceeded the 10-year average.
Source: Prime Insights and Analytics, June 2026.
AI Focus & Semis Positioning
- AI Dominance in Alpha: AI has driven the vast majority of fundamental equity L/S alpha YTD. At the end of H1 2026, almost 85% of the gross alpha generated by fundamental equity L/S funds was directly attributable to AI exposure. In contrast, AI alpha was much less significant for quants and multi-managers.
- Thematic Rotation:
- 2023–2024: Focused on Semis.
- 2024–2025: Shifted to Power & Data Centers.
- Last 12 months: Decisively rotated toward Memory stocks.
- Semiconductor Positioning: Net allocation to global Semis & Semi Equip stocks on the Prime book started the year at ~10%, more than doubled to a record high of ~24% in June, and has since pulled back to ~19%, which remains in the 84th percentile for the past year and the 95th percentile for the past 5 years.
Best vs. Worst Performing Sectors
- Best Performing Sectors
- TMT & Consumer: Returned +26.9% in H1 2026 (up from +15.1% in FY2025), propelled by the AI trade.
- Healthcare: +9.5% in H1 2026 (following a strong +33.6% in FY2025).
- Worst Performing Sectors
- Financials: Returned +3.1% in H1 2026 (down from +13.0% in FY2025).
- Energy, Industrials, Utilities: Returned +4.8% in H1 2026 (down from +12.4% in FY2025).
Allocator Sentiment & Hedge Fund Allocation
- We surveyed 341 allocators managing $1.5tn+ in hedge fund assets.
- Performance vs. Expectations: 40% of allocators reported H1 2026 performance was better than expected, 35% was in line, and 14% was worse (up from 9% worse in 2024–2025 due to higher manager dispersion).
- Asset Allocation Plans in H2 2026: Hedge funds are the most popular asset class, with 50% of allocators planning to increase exposure and only 3% planning to decrease (Net: +47%).
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