Institutional investors continued to recalibrate their portfolios in the first quarter of 2025, showing a clear tilt toward private markets, flexible credit, and diversifying hedge fund strategies.
The latest Manager Intelligence and Market Trends report from independent consultancy bfinance highlights how persistent geopolitical tensions and economic uncertainty are prompting more selective, risk-aware allocations.
Private market mandates accounted for 50% of manager searches in the 12 months to March 2025, up from 43% the previous year. Although still below the 2022 peak of 58%, this renewed momentum signals a broader shift in how investors are managing illiquidity within portfolios.
Demand for private debt and infrastructure remained robust, with infrastructure representing 13% of all private market searches. Investors increasingly favored semi-liquid vehicles and asset-backed strategies that provide stable income streams alongside greater liquidity flexibility—demonstrating a preference for resilience and adaptability in an uncertain environment.
"Investors are rethinking how risk is allocated—not just how much risk is taken," said Oliver Wade, Associate, Investment Content at bfinance.
"We’re seeing a pivot toward asset classes and strategies that offer both adaptability and resilience: private debt, multi-sector credit, real assets, and uncorrelated hedge fund styles. Manager selection has become a more targeted exercise, with allocators looking for precision tools to match a more complex environment."
Shifting Portfolio Design in a Volatile Environment
In public markets, equity mandates comprised 23% of total manager searches—down from 33% the year before but still well above the 17% recorded in 2022. Within equities, global strategies regained traction, accounting for 56% of equity searches, while interest in emerging markets surged.
Notable geographic standouts included India, Saudi Arabia, and GEM ex-China regions. There was also growing use of enhanced index and systematic strategies, reflecting a demand for more risk-controlled paths to outperformance amid choppy markets.
Fixed income search activity remained steady overall, but investor behavior shifted noticeably. Multi-sector strategies rose to 20% of fixed income mandates as investors sought more agile tools for managing interest rate and credit exposures.
In contrast, appetite for high yield strategies waned—falling to 7%—amid concerns over tight credit spreads and valuation risk. Emerging market debt continued to attract allocations due to attractive yield premiums and relative value opportunities.
Diversifying strategies saw renewed investor interest, with hedge funds accounting for 13% of total mandates. Allocations focused on market-neutral, event-driven, and alternative risk premia strategies—the latter delivering +3.7% returns in Q1, continuing a strong multi-quarter performance trend.
Systematic approaches that minimize directional risk were particularly favored during a quarter marked by volatility, reversals, and macroeconomic dispersion.
Frithjof Van Zyp, Senior Director at bfinance Australia, noted that the bfinance Risk Aversion Index hit a two-year high given the current geopolitical landscape and policy uncertainty.
“Manager positioning has remained resilient, however, we're starting to see growing interest in certain geographies like Europe, where specialist managers might not be on the radar for some Australian asset owners,” he said.
Broader portfolio construction trends in Q1 reflected ongoing caution. The reintroduction of tariffs by the U.S. administration reignited stagflation fears, prompting many investors to rotate into cash rather than bonds.
At the same time, gold reached record highs, reinforcing its role as a safe-haven asset amid inflationary and geopolitical stress. Equity market volatility spurred rotations away from U.S. exposures and into European and select emerging markets. Enhanced and systematic strategies also gained favor as allocators searched for sustainable alpha with controlled downside risk.
Manager performance diverged across asset classes. In equities, 56% of active global managers outperformed the MSCI ACWI benchmark, driven by value and defensive styles. However, impact-oriented strategies continued to struggle, underperforming across one-, three-, and five-year timeframes.
In fixed income, emerging market and multi-sector managers delivered strong results, while high yield managers faced increasing pressure. Among hedge funds, macro and trend-following strategies lagged, but beta-neutral approaches delivered standout performance.
As institutional portfolios adapt to a world defined by higher volatility, inflationary persistence, and policy shifts, the emphasis on flexibility, precision, and uncorrelated returns is shaping the next wave of mandate momentum.
ASIC has also released more than 50 public submissions received in response to its discussion paper on the evolving dynamics between public and private markets.
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