European Hedge Funds: The New Investment Darling of 2025

In recent years, the global financial market has been in constant flux, with investors shifting their focus between different regions and asset classes. According to a survey released by BNP Paribas on August 28, European hedge funds attracted more investor capital inflows in the first half of 2025 than their counterparts in other regions worldwide, emerging as the "darling" among investors' options.

Data from BNP Paribas’ survey shows that 37% of investors increased their allocations to European hedge funds, while an additional 33% of asset allocation institutions plan to further increase their holdings in the second half of the year. This figure underscores a growing confidence among investors in European hedge funds. So, what factors have enabled European hedge funds to stand out amid a sea of investment choices?

First, rising uncertainty in the U.S. market is a key driver behind investors’ capital shift to Europe. Since the start of this year, policy uncertainty in the U.S. has intensified, with frequent adjustments to tariff policies leaving investors adrift. For instance, the tariff policies of the Trump administration have triggered severe market volatility, fueling investor concerns about the prospects of the U.S. market. In contrast, the European market has remained relatively stable. Germany, for example, has stepped up fiscal stimulus to boost long-term growth prospects, injecting new vitality into the European economy and revealing more opportunities for investors.

Second, the strong performance of European hedge funds is another critical factor attracting investors. Amid market turbulence in 2025, European long-short equity hedge funds—known for their stock-picking expertise—have staged their first recovery in a decade. According to data from Hedge Fund Research, long-short equity hedge funds delivered a 9.2% return in the first half of the year, with a single-month return of 3.5% in June. They also attracted a net inflow of $10 billion during this period, making them one of the best-performing categories in the hedge fund industry. Notable examples include Chris Hohn’s TCI Fund and John Armitage’s Egerton Fund, both of which achieved returns exceeding 20% in the year to June, while SurgoCap Partners, a technology-focused fund, recorded a cumulative gain of 17% this year.

Furthermore, the valuation advantage of European stock markets cannot be overlooked. Although European stocks have risen this year, the forward 12-month price-to-earnings (P/E) ratio of the benchmark STOXX 600 Index stands at approximately 14 times—slightly above its long-term average but significantly more attractive than that of U.S. stock markets. Europe has a larger weighting in more cyclical sectors; as global economic growth accelerates, these sectors are expected to embrace better development opportunities, providing European hedge funds with a broader range of investment targets.

In terms of capital sources, U.S. investors are among the major contributors to European hedge funds. BNP Paribas’ survey indicates that approximately 73% of respondents are based in the U.S. As uncertainty in the U.S. market mounts, U.S. investors have begun turning their attention to Europe in search of more stable and promising investment opportunities. Meanwhile, capital from the Middle East has also been flowing into European hedge funds, injecting fresh momentum into the European market.

Among different types of hedge funds, credit hedge funds attracted the highest capital inflows, totaling around $4.5 billion, followed by multi-manager hedge funds and equity-trading hedge funds. This trend reflects investors’ focus on both pursuing returns and enhancing risk diversification and portfolio diversification.

However, the development of European hedge funds is not without challenges. Despite their current popularity among investors, the market still faces uncertainties. For example, a stronger euro may weigh on the profitability of European companies, thereby affecting the performance of European stock markets. Additionally, whether global economic growth can maintain its pace and whether issues such as trade frictions will escalate again will all impact the future development of European hedge funds.

Overall, European hedge funds have delivered a remarkable performance in the first half of 2025, attracting substantial investor capital inflows. Factors such as U.S. market uncertainty, the strong performance of European hedge funds, the valuation advantage of European stocks, and diversified investment opportunities have collectively driven investors’ preference for European hedge funds. Nevertheless, while focusing on European hedge funds, investors must also closely monitor market changes to make more informed investment decisions.