How hedge funds can help you invest like the 1 percent

By emulating the strategy employed by hedge funds, you can invest similarly to the 1%

Here's how.

Stock-picking hedge funds have had a great start to the year. According to a Goldman Sachs report, so-called long-short equity hedge funds returned about 6.7% for the year ending April 14, prior to the surge in equity markets following the announcement of the Middle East ceasefire. The SandP 500 gained 3.9 percent, while the MSCI World index gained 4.3 percent.

By taking long positions in their preferred companies and going short or placing bets against those they think are overpriced, long-short equity hedge funds attempt to outperform the market. This is but a portion of the £5.2 trillion hedge fund industry. Hedge funds can invest anywhere and in anything they want as long as they have the consent of their investors because they are targeted at high-net-worth and professional investors. For instance, the renowned oil trader Pierre Andurand's energy-focused hedge fund, the Andurand Commodities Discretionary Enhanced fund, saw a 31 percent return in the first quarter of 2026 thanks to bullish bets on the oil markets (though it lost 51 percent in April). Another fund, Point72 Asset Management, is a "multi-strategy" hedge fund that trades a variety of securities, including stocks, currencies, interest rates, and oil, in order to generate a profit. Despite the turbulence in international markets, it finished March up almost 4%.

Over the six months leading up to the end of March, the global hedge-fund industry received £89.3 billion in fresh capital, the largest two-quarter period of inflows since 2007. Investors have been especially fond of "Macro" funds, according to the most recent HFR Global Hedge Fund Industry report. These funds invest in all asset classes and use leverage to increase returns in an effort to profit from changes in financial markets brought about by political or economic events. Bridgewater Associates, Brevan Howard, Caxton Associates, and Rokos are examples of significant macro firms. The HFRI Macro (Total), HFR's benchmark index for these funds, outperformed the MSCI World index by 8.5 percent in the first quarter with a return of 4.9 percent. In the meantime, HFRI's fixed-income index, the HFRI Relative Value (Total), increased by 1.4 percent during the quarter, which is roughly 2.6 percent better than the BofA Global Broad Market Corporate bond index's -1.2 percent return and 3.3 percent more than a broad index of UK gilts.

Hedge funds are not as unique as they seem.

These returns highlight the main justification for including hedge funds in a portfolio: by exposing investors and fund managers to assets they might not have the knowledge or resources to trade on their own, they can help lower volatility. Nonetheless, the majority of hedge funds demand a minimum investment of about £100,000. Some won't speak to you unless you're prepared to pay millions of dollars. Additionally, investors typically hold a portfolio of funds, each with a distinct focus, in order to maximize these vehicles. Therefore, investors need several million pounds to fully capitalize on the sector. For this reason, only the wealthiest individual investors are typically able to access hedge funds.

However, there are a few options available to UK investors. In addition to one publicly traded London-based hedge fund that is listed on the London Stock Exchange, there are several hedge funds that are organized as investment trusts.

For those looking to diversify their portfolios, there are options on other exchanges worldwide in our globally interconnected financial markets.

In actuality, hedge funds are quite similar to the funds accessible to the typical retail investor, despite the fact that they are frequently depicted as exotic and complicated. Simply put, a hedge fund is a collection of private investors created with the intention of earning a return on their capital over a predetermined time frame. Instead of outperforming a benchmark, they frequently aim for a positive absolute return; that is, they want to achieve a positive return regardless of whether the overall market is rising or falling.

However, the rules governing hedge funds are far more lenient since they typically concentrate on high-net-worth investors and institutions (like pension funds). Hedge-fund managers have far more freedom in terms of where and how they can invest because it is assumed that the institutions and wealthy individuals who choose to invest in hedge funds are capable of evaluating the proposition themselves.

Hedge-fund managers are also not required to disclose their holdings or the reasons behind them. Some managers may choose to update investors once a year and own a small number of distinct assets. Thousands of different investments may be held by others, and teams of traders may buy and sell positions on a minutely basis. Additionally, compared to the active funds accessible to the general public, hedge funds typically have higher fees. Managers typically use a "two and 20" structure, with a management fee of 2% annually and a performance fee of 20% of any profit, though they will give more favorable terms to more significant clients. Although the extra fees certainly affect returns over time, they guarantee that the managers, who frequently have a significant stake in the fund themselves, have a strong incentive to attain the highest returns. Active funds targeted at the mass market typically don't have this kind of incentive structure.

Additionally, hedge funds often prevent their investors from taking money out. When employing esoteric or illiquid investment strategies, this can be useful because managers don't want to deal with a lot of redemption requests at once, which could force them to sell assets at a difficult time. In this regard, investment trusts and hedge funds are very similar. Hedge funds can temporarily lock in their capital, while investment trusts have a fixed capital base. When investors make their first investment, some funds require a five-year commitment. Some might demand that they submit redemption requests on a quarterly basis instead of every day. Additionally, they frequently retain the authority to "gate" withdrawals, or stop investors from accessing their money, if the manager feels that doing so would negatively affect investment returns.

Archegos Capital Management was founded by Bill Hwang.

The founder of Archegos Capital Management, Bill Hwang.

Hedge funds can and do use leverage, or borrowed funds, to increase returns, just like investment trusts. But in the past, when managers borrowed too much money too quickly, this had disastrous results. Bill Hwang's Archegos Capital, which failed after borrowing £160 billion with only £20 billion in capital, is among the most prominent recent examples. Hwang's £20 billion net worth was destroyed overnight by the funds collapse, which also caused Credit Suisse, a major international investment bank, to fail. In another instance, Gabe Plotkin's Melvin Capital lost roughly £4.5 billion, or 49% of its assets, in a matter of weeks during the first quarter of 2021 after using borrowed money to bet against GameStop. Only after receiving a £2.5 billion bailout did the fund survive; however, a year later, it permanently closed.

Only people manage hedge funds.

Over the years, hedge funds have come under heavy fire, mostly for their fees. Hedge-fund managers generated up to £600 billion in value added, before fees, between 2013 and 2019, according to a study titled "A Bias-Free Assessment Of The Hedge Fund Industry" that was released in February of that year. The number was much lower after fees. In fact, according to a 2020 study titled "The Performance Of Hedge Fund Performance Fees" that examined 22 years' worth of hedge fund data, fees ultimately accounted for 64% of the gross returns on investors' capital.

Naturally, hedge-fund managers would contend that since they outperform the market, they should be paid more. And that is somewhat accurate. They are, however, merely human. Another study, "Higher Risk, Lower Returns: What Hedge Fund Investors Really Earn," which was published in May 2011, discovered that while the buy-and-hold return of a hedge-fund portfolio between 1980 and 2008 was 12.6 percent, which was higher than the S&P 500's total return of 10.9 percent during the same period, the dollar-weighted annual return, which took investor inflows and outflows, was only 6 percent. This demonstrates that even though the majority of hedge fund investors are significantly wealthier than the typical investor, psychological biases still affect them. In fact, the average investor lost 1.2 percentage points a year over the previous ten years as a result of poorly timed purchases and sales, according to Morningstar's most recent Mind the Gap report. Numerous investigations have come to the same conclusion.

But concentrating solely on this performance misses the mark. Only as part of a portfolio should hedge funds and alternative strategies be utilized to help smooth long-term returns and provide diversification. Universa Investments, a hedge fund, is a prime illustration of what an alternative strategy or hedge fund can offer. Universa specializes in risk mitigation against "black swan" events, or unforeseen, highly consequential sources of market volatility. To do this, it uses a customized mix of stock options, credit-default swaps (a type of credit insurance on corporate debt), and other derivatives to wager on changes in the market. Universa reportedly oversees £20 billion and reported a 100% return on capital when Donald Trump announced his broad tariffs in April of last year, despite the fund's extreme secrecy. When the pandemic started in March 2020, it reportedly made 4,000 percent.

Universa is by no means the only fund that has profited greatly from this strategy. After spending £26 million to purchase a portfolio of credit-default swaps, which subsequently increased in value by more than 10,000 percent, Bill Ackman's Pershing sq\. hedge fund made £2.6 billion during the pandemic. It can be beneficial to have a manager who is focused on identifying opportunities because these trades don't occur frequently.

When wealthy people and businesses invest in hedge funds, they do so as part of a portfolio that is widely diversified. This lessens the chance of volatility, fee-related return erosion, and any single hedge fund blow-up. According to data compiled by Goldman Sachs and the French bank BNP Paribas, public pension funds typically allocate up to 12 percent of their funds to hedge funds and other alternative assets, while insurers typically allocate between 3 and 10 percent. Because they have a much longer-term focus, university endowments are able to take on larger roles.

Pension Plan Investment Board of Canada (CPPIB).

Endowments typically allocate between 15 and 40 percent of their assets to emerging-market, long-short, and event-driven hedge funds. According to research, family offices, which can also adopt a longer-term perspective, also typically have a larger allocation, though it is usually capped at about 25 percent.

The Canada Pension Plan Investment Board (CPPIB) is one of the most active hedge fund investors worldwide. After years of supporting and investing in new hedge-fund managers, this £714 billion fund has amassed a £76 billion portfolio of both internally and externally managed funds. The fund's 2025 annual report states that, primarily as a result of external fund allocations, its strategies have produced £15.6 billion more net added value over the previous five years than its benchmark.

Hedge funds that the typical investor can purchase.

Although the majority of hedge funds are off-limits to the typical investor, the UK is in a unique position because there are several publicly traded hedge funds that people can purchase and sell on the London Stock Exchange. Man Group (LSE: EMG), the largest publicly traded hedge fund in the world, and Pershing sq\. Holdings (LSE: PSH) are two of these that are included in the FTSE 100.

Founded in 2004 by Bill Ackman, Pershing sq\. Capital Management is the company that manages Pershing sq\., which went public in London in 2017. It is a selection of the best ideas rather than an exact replica of the parent company's fund. Although a total of 15 holdings are currently listed, the fund's goal is to hold eight to twelve core holdings grouped under an investment trust structure. In addition to being accessible to smaller investors, it has an independent board of directors that oversees and guarantees their representation. The trust has an annual management fee of 1.5% and a performance fee of 16%, which is typical of hedge funds. The management would contend that the high fees were more than justified by the returns. In terms of net asset value, the fund has generated an annualized return of 11.8% since its launch in 2012, while the FTSE 100 has produced an annualized return of 6.5% in US dollars. Uber, Amazon, Google, and Meta are among the current holdings.

The Pershing sq\. Fund IPO of Ackman has raised £5 billion.

Man Group operates a variety of investment products under different investment strategies. Its computer-driven trading arm, AHL, is responsible for its primary options, which have done especially well this year. Its AHL Dimension returned 5.6% and its AHL Alpha fund added 5.7% during the three months leading up to the end of March. Man Strategies 1783 recorded a 3.8 percent return. As a result of this strong performance during a volatile quarter, assets increased from £227.6 billion at the end of 2025 to £228.7 billion in the three months ending in March. Purchasing Man Group stock will expose investors to the company's revenue stream but won't give them direct access to its underlying strategies. The hedge fund's shares yielded an annualized return of 11.6 percent for the year ending April 24 and 13.8 percent over the previous five years.

BH Macro is another London-based choice for investors (LSE: BHMG). One of the biggest and most prosperous macro hedge funds in the world, the Brevan Howard Master Fund, is the sole investment held by this investment trust. The purpose of this trust is to give investors a way to diversify away from stock markets. There have been twenty notable market downturns since the first half of 2007, during which the US S&P 500 index has dropped by five percent or more. In fact, BH Macro's net asset value rose in 17 of these 20 periods. When the S&P 500 dropped by over 15% in October 2008, for instance, the fund's net asset value increased by a few percentage points. Since its founding, the fund, which has 150 traders and portfolio managers, has produced an annualized return of 8.5 percent with less volatility than in larger equity markets.

Tetragon Financial (LSE: TFGS) is another choice. Bank loans, credit, real estate, hedge funds, and private companies are all part of this trust's portfolio. Since its launch in early 2007, its net asset value has increased by 612 percent, almost doubling the MSCI All Country World index. It levies an annual management fee of 1.5% and a performance fee of 25%.

One of the biggest publicly traded asset managers in the world is Blackstone (NYSE: BX). Founded in 1985, it began as a private equity and mergers and acquisitions firm before branching out into fund management, real estate, private credit, and even hedge funds. With the Blackstone Multi-Strategy Hedge Fund, or BXHF, which will begin trading this year, the £1 trillion asset manager is spearheading the effort to introduce hedge funds to high-net-worth individuals. Bloomberg reports that in addition to making its own investments, the fund will allocate roughly 30% of its assets to other hedge funds. Once it achieves at least a 5 percent return, it will deduct a 12.5 percent profit cut and charge a 1.25 percent management fee. Blackstone, which offers diversification across several industries, may be one of the greatest ways to invest in the burgeoning alternative asset market.

Although there aren't many ways to invest directly in hedge funds and hedge-fund managers, investors can diversify their portfolios and increase their exposure to alternative assets by using a variety of investment trusts. One of the biggest specialized biotechnology funds in the world, Pharmakon Advisors, is the parent company of BioPharma Credit (LSE: BPCR), which lends directly to biotechnology companies and yields 7.5%. The trust has an almost perfect lending history.

In order to provide investors with a high single-digit annual dividend, the TwentyFour Income Fund (LSE: TFIF) and TwentyFour Select Monthly Income (LSE: SMIF) concentrate on trading collateralized loan obligations and mortgage-backed securities. Despite being extremely specialized vehicles, these funds can aid in portfolio diversification.

CVC Income and Growth (LSE: CVCG) is another option on the credit side. The private equity behemoth CVC oversees this investment trust, which has a portfolio of senior secured loans that were purchased for both yield and value. Once more, the trust might offer investors diversification in erratic times.