By Nell Mackenzie

LONDON (Reuters) - Investors, fearful of choppier markets in 2025, are again favouring alternative trades and moving away from hedge fund strategies that profit when broader markets rise or fall, a Barclays investor survey showed on Tuesday.

They want hedge funds to shrink the proportion of their strategy that profits from so-called 'beta', or the movement of broader markets, to between 15% and 5%, with some as low as zero, the Barclays survey of 325 hedge fund investors overseeing almost $9 trillion showed.

Heady stock valuations and an AI-related frenzy saw the hedge fund industry lose billions on Jan. 29 during a tech stock rout sparked by the emergence of DeepSeek, a low-cost Chinese artificial intelligence model.

While hedge fund crowding into tech stocks had dropped from its 2023 peak, concentration in these trades before the rout was still high compared to pre-pandemic levels.

Hedge funds' beta as a broader industry is just over 20%, said Roark Stahler, head of strategic consulting Americas at Barclays.

Uncertainty surrounding the new U.S. administration's policies means hedge fund investors are looking for less exposure to broader stock markets and towards strategies that take advantage of volatility, said Jon Caplis, CEO of hedge fund research firm PivotalPath.

"Equities and their valuations have risen substantially and potentially unsustainably since 2020 (S&P 500 annualizing 14.5% since 2020)," he added.

Hedge fund strategies such as long and short stock pickers, credit and those linked to activism have fallen out of favour with investors, the Barclays report said.

Instead, investors this year prefer hedge funds that use algorithms to trade the difference in the relative values of stocks and assets affected by mergers and acquisition deals, said the bank's report.

Multimanager funds which trade many ideas under one roof topped investors' wish-lists for hedge fund allocation, it said.

Multimanagers returned to investors 56% of investment share in 2024 compared to less than half the year before, Barclays data showed.

These hedge funds require investors to pay their running expenses and also take a cut of performance returns.

The biggest hedge funds have grown almost 50% in size in the last 10 years, said the data.

In 2014, the average top-20 hedge fund oversaw around $34 billion in assets, whereas today it manages around $50 billion.

Smaller and mid-sized hedge funds only grew by roughly a billion in assets during the same timeframe.

(Reporting by Nell Mackenzie; editing by Dhara Ranasinghe and Jan Harvey)