Hedge funds win fresh capital as AI trade lifts returns

Hedge funds raised more capital than planned for the first time in three years, Bank of America said. AI-linked gains lifted demand.

The bank’s internal report said hedge funds are likely to rank as the most favored asset class for the rest of 2026 among the allocators it surveyed. The shift follows a first half in which the industry posted its strongest performance since 2010, according to Bank of America.

AI gains reset fund demand

Bank of America’s global markets capital strategy group surveyed 321 asset allocators, a pool that included pension funds, private banks and vehicles that invest across portfolios of hedge funds. The report is expected to be sent to the bank’s clients this week.

The survey showed hedge funds up 5.5% for the year through July, compared with the industry’s weaker fundraising pattern over the previous three years. Bank of America said July’s pullback in AI-linked stocks reduced returns, but did not erase the year-to-date gain.

The allocator preference was concentrated in equity funds and multi-manager platforms, according to the report. Technology, media and telecommunications, healthcare and energy remained the most sought-after sector exposures among the respondents.

Allocators favor global managers

Vanessa Bogaardt, Bank of America’s global head of capital strategy group and consulting services in prime financing, said allocator interest was strongest for managers with broad geographic mandates. “We are seeing strong interest (from allocators) in managers that invest globally,” she said.

Limited partners, the investors that commit capital to hedge funds, are also showing a greater willingness to back newer firms, according to the survey. Bank of America said 60% of those investors chose new fund managers over more established managers, an allocation pattern Bogaardt described as less common historically.

The report said investors overseeing roughly $1 trillion of hedge fund capital ranked stock-picking strategies highest for the rest of 2026. That preference gives equity managers a clearer fundraising channel than strategies more dependent on credit spreads, private valuations or redemption terms.

Private credit faces scrutiny

Private credit funds drew a cooler response in the survey, Bank of America said. The bank tied the weaker sentiment to closer examination of opaque valuations, redemption pressure at some non-traded funds and exposure to software companies facing disruption from artificial intelligence.

The contrast matters for large allocators deciding where to place marginal dollars in the second half. Pension funds and private banks planning fresh commitments may favor hedge fund liquidity and daily market pricing over credit vehicles where valuation marks and exit terms can be harder to compare.

For hedge fund firms, the survey points to a fundraising market that is more selective than broad. Allocators appear to be rewarding managers tied to liquid equity trading, global mandates and multi-manager infrastructure, rather than simply adding capital across the industry.

Prime brokers gain fee tailwind

Large banks also benefit when hedge funds add assets and increase trading activity. Bank of America said major banks recorded stronger prime brokerage gains in the most recent quarter, helped by lending and financing fees from prominent multi-strategy hedge funds.

Prime brokerage revenue is linked to balances, leverage, securities lending and trading volume. If market volatility supports multi-strategy returns, banks with large hedge fund financing businesses can earn more from client activity without taking the same direct market exposure as the funds.

If allocator demand holds through 2026, global capital flows may keep shifting toward liquid alternatives, Bank of America’s prime brokerage franchise could see continued financing demand, and the hedge fund industry may concentrate more assets in equity and multi-manager platforms.

If AI-linked weakness deepens or private credit stress spreads, risk appetite could narrow, the bank’s fee tailwind may fade, and managers with crowded technology exposure could face tougher fundraising conversations.