In 2025, hedge funds are no longer confined to chasing short-term volatility or crowded U.S. mega-cap trades. Instead, the search for alpha is shifting toward structural transformations across geographies and sectors. Asia, particularly Japan and China, has emerged as fertile ground for differentiated strategies, while Europe offers a more nuanced picture—defensive in some respects, but beginning to show green shoots of recovery tied to fiscal expansion and manufacturing revival.
Thematic bets on artificial intelligence, semiconductors, supply chains, and corporate governance reform cut across these regions. The opportunity lies not only in picking winners, but in exploiting the widening dispersion between winners and losers across geographies.
Japan: Corporate Profits, Market Structure, and Governance Renaissance
For decades, Japan was synonymous with stagnation. Today, the picture is different. Corporate profitability is climbing, governance reforms are taking root, and international capital is flowing back into Japanese equities. Both all-industry and medium-sized corporate profits are rising steadily — appearing to be a structural shift rather than a cyclical blip.
Chart 1: Japanese corporate profits are rising; source: Apollo Chief Economist
The profitability boom is not evenly spread. Large-cap firms, many of them exporters, are benefiting from a weak yen and operational leverage, while medium-sized corporates are showing robust catch-up growth. Hedge funds are exploiting this by going long selective mid-cap firms positioned for operational efficiency and shorting laggards still trapped in legacy structures.
Chart 2: Japanese equities have been led by Large Caps recently; source: Apollo Chief Economist
Japan’s growth equities have shown resilience through varied market cycles, supported by strong balance sheets and disciplined management. This resilience became more evident in the post-Covid period, where Japanese growth companies began to outperform both local and global benchmarks. Hedge funds that once dismissed Japan as a low-growth market are reassessing, particularly as structural profitability improves.
The three years after Covid saw narrow, concentrated performance in Japan. Investor attention shifted to “cheap-yen beneficiaries” such as exporters and inbound-tourism plays. Flows leaving China further amplified demand for these stocks, which were often misclassified as value trades rather than tactical currency plays. Hedge funds initially rode this wave, but more sophisticated strategies now look beyond currency-driven distortions, seeking alpha in durable growth and governance shifts.
Japan’s growth story runs deeper than short-term flows. Positioned at Asia’s gateway, Japan has long been a hub of technological and aspirational innovation. Leading semiconductor companies, robotics firms, and global consumer brands have transformed a resource-poor archipelago into one of the world’s largest developed economies. These firms continue to adapt and thrive, making Japan’s growth equities a consistent source of alpha for managers who can differentiate between structural innovators and cyclical beneficiaries.
This structural resilience, coupled with corporate governance reform and rising foreign inflows, is reshaping Japan from an overlooked market into one of the more compelling equity stories globally.
China: Complexity and Thematic Exposure
China presents a more complex environment. The property sector remains weak even after government stimulus, demographics are deteriorating, and debt levels are elevated. Private consumption remains constrained due to negative wealth effects and high urban youth unemployment. Private investment is also constrained due to weak profit growth, uncertainty over the impact of U.S. tariffs and elevated real borrowing costs. Thus, GDP growth is low for the country's standards at around 4% p.a.
Yet, Beijing’s focus on EV, robotics, technological self-sufficiency, semiconductors, and AI ecosystems is creating opportunities for hedge funds willing to manage volatility. The stock has rallied substantially recently, as it was cheap and was supported by government, but it has again reached normal valuation levels.
Chart 3: Chinese equities have rallied, thus erasing their recent cheapness; source: Brevan Howard Chief Strategist
Funds are treating select Chinese equities less as “China macro” exposure and more as global thematic proxies. Semiconductor firms receiving state support, AI hardware manufacturers, and renewable energy companies are being positioned as long-term structural longs, especially given still relatively reasonable valuations. Hedge funds are simultaneously shorting overvalued peers vulnerable to policy intervention or U.S. sanctions.
This barbell approach — longing reform-driven winners while hedging systemic risks —allows managers to generate alpha in one of the world’s most politically and economically complex markets.
Europe: Valuations, Growth, and Fiscal Divergence
If Japan is about reform and China about selective thematic exposure, Europe sits in between. European equities have lagged the U.S. for 15 years, but the tide may be turning.
The valuation gap between U.S. and European equities reached 9 P/E points in late 2024 — an extreme level even accounting for U.S. mega-cap dominance. Since then, the gap has narrowed but remains historically wide.
Chart 4: The valuation gap between European and U.S. Equities has become very wide; source: Deutsche Bank
For hedge funds, this valuation discount is less about buying the index and more about exploiting dispersion within Europe: shorting legacy industrials while going long on niche luxury exporters and renewable energy firms.
On the macro front, Europe’s growth lagged the U.S. for years. Yet, Germany’s EUR 800bn fiscal expansion — focusing on defense and infrastructure — is expected to deliver spillover benefits to the broader Eurozone. The GDP growth differential between Germany and the U.S. may narrow in the coming years.
Chart 4: The difference in real GDP Growth (Germany minus US) is narrowing; source: Deutsche Bank
This is not to say Europe is without risks. Political fragmentation—from French parliamentary instability to Italian fiscal strains—remains a structural drag. But compared to U.S. fiscal imbalances, Europe’s debt trajectory looks more sustainable.
Chart 5: Debt-to-GDP and fiscal balance: Eurozone offers better macro stability vs. US; source: Deutsche Bank
The relative fiscal discipline provides a degree of resilience. For hedge funds, this translates into relative value trades: long Europe’s fiscal beneficiaries while shorting over-leveraged U.S. peers in similar industries.
Thematic Convergence: AI, Supply Chains, and Data Infrastructure
The Asian and European narratives converge around one megatrend: AI and its supply chain. Japan’s dominance in semiconductor equipment, Korea’s role in advanced memory, Taiwan’s centrality in foundries, and China’s push for domestic self-reliance create a regional ecosystem that hedge funds are actively mapping into portfolios.
Data centers, electricity providers, and logistics firms are also part of this ecosystem. Meanwhile, European firms tied to renewable power and grid modernization are attracting capital as AI-driven energy demand rises. The cross-continental theme of “AI infrastructure” offers hedge funds a way to construct portfolios that transcend narrow geographic bets.
Conclusion
The hedge fund industry is evolving. No longer content with chasing cyclical rotations, funds are positioning as interpreters of structural change:
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Japan: Profitability, governance reform, and enduring innovation as new sources of alpha
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China: Selective tech and thematic plays amid macro headwinds
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Europe: Valuation discounts, fiscal revival, and niche thematic winners
In all three cases, hedge funds are exploiting divergence: between large- and mid-cap Japan, between China’s policy winners and losers, and between Europe’s fiscal revival in light of U.S. debt overhang.
For allocators, the message is clear: alpha increasingly lies not in broad regional exposure, but in precision, selectivity, and thematic conviction. In a fragmented world, the funds that can translate structural transformations into risk-adjusted returns will define the next era of hedge fund investing.