Asian institutional investors are increasing allocations to hedge funds as volatility in bond markets and concentration risks in equities drive demand for alternative strategies, according to a report by Reuters.

At Swiss private bank UBP, hedge-fund-only mandates among Asia-based discretionary portfolio management clients have more than tripled since the end of 2024, as investors question the diversification benefits of traditional stock and bond portfolios.

The shift comes as global hedge fund assets reached $5.6tn in the second quarter of 2026, following a record quarterly increase of $409bn, according to Hedge Fund Research (HFR).

HFR's global hedge fund index returned 12.4% in 2025, its strongest performance since 2009, and has gained a further 7% year-to-date. By comparison, global equities have risen approximately 36% since the end of 2024, while government bonds have declined 7%.

Indonesia's sovereign wealth fund Danantara is targeting a 5% hedge fund allocation to generate more stable returns and limit drawdowns, while some institutional investors previously absent from the sector are considering exposures of around 10%, according to Marsh.

Demand is particularly strong for multi-strategy, macro and quantitative managers offering low correlations to traditional markets. Japanese pension funds, family offices and private wealth clients are among those increasing their interest.

Growing dispersion between AI-related winners and losers, alongside geopolitical uncertainty, is also creating opportunities for long-short equity managers.

Acadian Asset Management, which oversees approximately $233bn, has seen its assets in Asia quadruple over four years. Chief Executive Officer Kelly Young said investor interest was at its highest level in two decades.

J.P. Morgan Private Bank said hedge funds are increasingly being treated as a strategic portfolio allocation rather than a tactical investment, reflecting a broader shift towards diversification beyond traditional equities and bonds.