Hedge funds are experiencing an unexpected surge in capital inflows, breaking a three-year trend of stagnation. According to an internal report compiled by Bank of America and reviewed by Reuters, hedge fund managers have raised more capital than planned at the start of the year for the first time in three years. The surge is attributed to impressive performance driven by the artificial intelligence sector, with hedge funds up 5.5% this year through July - their best first-half performance since 2010. However, the AI boom has also created challenges, with several prominent hedge funds experiencing drawdowns due to their exposure to AI trades during July's selloff. As per Reuters, the industry is likely to emerge as the most popular asset class for the rest of 2026, with allocator demand being the highest for equity and multi-manager platforms within hedge funds this year.
According to a survey of 321 asset allocators by Bank of America's global markets capital strategy group, allocator demand has been the highest for equity and multi-manager platforms within hedge funds this year. The survey, due to be sent to the bank's clients this week, reveals that pension funds and private banks are planning to invest more dollars in hedge funds this year, with 60% of limited partners picking new fund managers over more experienced managers. Vanessa Bogaardt, Bank of America's global head of capital strategy group, noted strong interest from allocators in managers that invest globally, as reported by Reuters. She emphasized that this preference for new managers is not something the industry has seen necessarily always in the past, indicating a significant shift in investor behavior.
Technology, media and telecommunications, healthcare and energy continue to be the most popular sectors among investors, according to the Bank of America survey. Sentiment is expected to be the highest for stock-picking funds through the remainder of 2026, according to investors overseeing roughly $1 trillion of invested capital in hedge funds who were surveyed for the report. However, investors are less bullish towards private credit funds, with concerns growing over opaque valuations, redemption pressure at some non-traded funds, and overall exposure to the software industry disrupted by AI. The survey, conducted by Bank of America's global markets capital strategy group, highlights how the AI boom has fundamentally shifted investor preferences toward hedge fund strategies that can capitalize on technological disruption.
Despite rising interest rates, the US economy has demonstrated remarkable resilience, with AI-driven capital expenditure and data centre investment helping support economic activity. As reported by Barclays Brief podcast, this surge in AI-related spending is creating a parallel source of demand for materials and skills that would typically be affected by higher borrowing costs. The housing market, traditionally sensitive to mortgage rate increases, is experiencing limited construction job losses due to the AI buildout, creating a buffer against traditional economic transmission mechanisms. This resilience is particularly notable as the US 10-year Treasury yield has reached 5%, with investors facing a sharp repricing in bond markets after initially expecting interest rate cuts at the start of 2026.
During the most recent quarter, Wall Street's biggest banks reaped handsome gains from their prime brokerage units, earning bumper fees from lending to the world's most prominent multi-strategy hedge funds that rode market volatility to produce big returns during the first half of the year. The surge in hedge fund allocations comes as the industry recorded its best first-half performance since 2010, with the artificial intelligence boom lifting performance across the sector despite some drawdowns in July. This increased activity in prime brokerage reflects the broader capital surge in the hedge fund industry, with investors allocating more capital to the biggest money managers after the AI boom's impact on first-half performance.
