[Edaily Marketin YunJi Kim Reporter] Changes are emerging in the alternative investment asset allocations of global institutional investors. While private debt—which grew rapidly in recent years amid a high-interest-rate environment—has now entered a phase of more selective screening of investment targets and managers, hedge fund strategies that can capitalize on market volatility are once again drawing attention.

According to an internal Bank of America (BofA) report obtained by Reuters on the 15th, a survey of 321 global institutional investors revealed that pension funds, fund of funds managers, and private banks plan to increase their allocations to hedge funds this year. As volatility in financial markets—including stock markets and interest rates—persists, institutional investors are showing growing interest in strategies that seek profit opportunities without relying heavily on market direction.

This demand is translating into actual capital inflows. According to the Bank of America report, hedge fund managers’ capital raising this year has exceeded projections made at the start of the year. Although specific fundraising figures were not disclosed, the report notes that this is the first time in three years that capital inflows have surpassed early-year forecasts. Earlier in May, Bank of America reported that global hedge fund assets under management had risen to $5.2 trillion (approximately 7,107 trillion won) by the end of last year, and that net inflows last year reached $116 billion (approximately 158 trillion won)—the highest level since 2007.

However, investor interest is not evenly distributed across all hedge fund strategies. In particular, the survey found that equity strategies—which involve directly selecting, buying, and selling individual stocks—and multi-manager platforms, where multiple investment teams simultaneously employ diverse strategies, were highly favored. In terms of investment sectors, technology, media, telecommunications, healthcare, and energy were highlighted. This is interpreted as a result of growing demand to seek profit opportunities by individual stocks and strategies rather than betting on the overall market direction.

Recent strong performance also supports this trend. Global hedge funds posted a 5.5% return from the start of the year through July, with first-half performance ranking among the highest since 2010. Consequently, investors are not only increasing their hedge fund allocations but also broadening their selection of managers. Approximately 60% of respondents said they plan to establish new relationships with other hedge fund managers rather than simply allocating additional funds to their existing managers.

In contrast, attitudes toward private credit—which has rapidly attracted institutional capital in recent years—are becoming significantly more cautious. Bank of America cited the inherent valuation opacity of unlisted assets, along with high exposure to software companies expected to undergo business model shifts due to the proliferation of artificial intelligence (AI), as key concerns. This means that even in the private credit sector—which has long attracted institutional investors with its stable cash flows—there is now a growing need to scrutinize risks associated with borrowers, assets, and individual managers in greater detail.

However, the view in both domestic and international capital markets is that it is too early to conclude that the growth momentum of the private lending market has stalled. This is because banks’ lending standards remain conservative, and corporate demand for financing continues, meaning the role of private lending itself has not diminished. However, institutions that had rapidly increased their exposure to private lending based on high interest rates are now selecting assets and asset managers more selectively while simultaneously broadening their investment scope to include other absolute-return strategies, such as hedge funds.

Commenting on the report, a source in the global capital markets said, “Rather than allocating funds uniformly across the entire asset class, there has always been a trend of deciding whether to invest based on performance differences by strategy and manager, and this has become even more pronounced recently.” The source added, “With regard to private debt, it should be viewed not as a disappearance of investment demand, but rather as a stronger tendency to be more selective about managers and assets than before.”