By Anirban Sen
NEW YORK, Feb 2 (Reuters) - Hedge funds have been diversifying their allocations away from North America over the past year, as money managers contend with market volatility driven by global trade tensions, policy uncertainty and a weaker U.S. dollar.
Recent reports from a number of Wall Street's leading prime brokerages, including Goldman Sachs and JPMorgan, and interviews with four hedge fund industry insiders who declined to be named talking about sensitive topics, indicate that demand
for North America-focused hedge fund strategies has fallen over the past year, while appetite for other markets has benefitted.
"One of the major market narratives in 2025 was the focus by investors on diversifying away from the US, as a result of heightened policy uncertainty and dollar weakening. Hedge fund portfolios appear to be no exception to this," Goldman Sachs said in a January report that was sent to clients.
The biggest winners from this gradual shift have been Asia-focused managers, with the region being the best performer in 2025, according to reports from Goldman Sachs, JPMorgan, and Morgan Stanley that were published earlier in January. At the start of the year, investor appetite for Asia stood at the highest level since 2022 - according to the Goldman data, Asia allocations were up 13% on a net basis at the start of this year, compared to 7% last year. Allocations to North America are set to rise at a slower rate this year at 7%, compared to an increase of 14% at the start of last year.
According to a report from BNP Paribas' prime services and capital introduction team that was sent to clients on Friday, Europe was the most widely sought-after region for investors in 2025, with 30% of allocators on a net basis adding hedge fund allocations in this region. A net 23% of allocators added to North America-focused fund strategies in 2025, down significantly from the 39% who allocated in 2024, BNP added.
"This reinforces a theme across 2025 of allocators looking to diversify away from the US," said BNP's Marlin Naidoo and Ashley Wilson in the report.
One of the factors contributing to reduced U.S. exposure has been a recent sell-off in "Magnificent Seven" stocks. According to a JPMorgan note dated January 23 that was sent to clients, long/short funds sold down their positions in the seven megacap stocks over the past three months, bringing holdings down from historical highs to an average ratio, compared to the last three years.
"Unlike 14 to 15 months ago, when practically everyone was heavily invested in the U.S., particularly bearish on Europe, and not as focused on Japan, this time the allocation is much more balanced across regions," said John Schlegel, head of positioning intelligence at JPMorgan.
"We’re seeing a renewed willingness to invest in Europe and Japan, rather than a significant pullback from the U.S. overall," Schlegel said.
The latest moves come at a time when global macro funds that pick stocks and trade bonds and currencies have enjoyed their best performance in more than a decade, Reuters reported earlier in January. Hedge fund industry assets stood at more than $5 trillion at the end of last year, according to figures from data provider Hedge Fund Research, the highest level since 2007.
SHEEN WEARING OFF?
To be sure, while that has meant that some of the sheen has worn off from the U.S. exceptionalism trade, the hedge fund industry is still a long way from meaningfully re-allocating assets to other developed and emerging markets as North American financial markets continue to lead other global economies by a comfortable distance, several fund managers and asset allocators told Reuters.
"On the push side, the U.S. is facing a fairly unusual mix of policy uncertainty, fiscal concerns, and a maturing earnings cycle. That doesn’t mean allocators are 'selling the U.S.,' but it does raise the bar for adding risk and makes it harder to justify concentration after such a long period of U.S. dominance," said Bruno Schneller, managing partner at multi-family office Erlen Capital Management.
"Even if some of these risks fade, the incentive to diversify feels more structural than tactical at this point," said Schneller.
Moreover, the pace of allocations moving to other regions outside North America has slowed down in recent quarters, according to recent data from top prime brokerages. In the January report, Goldman said it actually observed a bigger fall in interest in North America-focused strategies at the middle of last year. Since then, the shift towards other economies has moderated, while demand for Asia has continued to strengthen, Goldman added.
Some asset allocators and hedge fund managers said any talk of a major shift in assets to other regions is "greatly exaggerated," pointing to America's vast superiority in areas such as artificial intelligence, aerospace & defense, and pharmaceutical innovation over the rest of the world.
"If you look at where investors want to put their money, everything points to the U.S.," said Mario Unali, head of investment advisory at Kairos Partners, an asset and wealth management firm.
(Reporting by Anirban Sen in New York; editing by Megan Davies and Diane Craft)
