In a world of uncertainty, hedge funds are finding opportunity

Just a month into 2026, we’ve already seen a significant amount of market volatility driven by geopolitical events. In this context, why might clients want to consider adding some hedge fund exposure to their portfolio?

In a world where macroeconomic volatility is unavoidable, you want return engines that don’t rely on equities or fixed income. The advantage of hedge fund strategies in this environment is that they are not one thing — they’re a toolkit that can either dial down macro exposure or express high‑conviction views with precision. Their role isn’t to beat the stock market every year; it’s to deliver uncorrelated outcomes so the overall portfolio works harder.

What has also changed recently is the opportunity set for hedge funds: since 2021, policy, inflation and geopolitics have created more dispersion — exactly the environment where these strategies earn their keep. At the same time, the hedge fund industry has evolved: large, multi‑strategy platforms with strong risk systems can re‑deploy capital quickly as opportunities shift.

For Australian wealth clients, we are also seeing access and education around hedge funds improving — with more liquid vehicles, clearer fee alignment, and globally connected capabilities available through local wrappers.

What role do hedge funds play within the broader ‘alternatives’ basket?

“Alternatives” is a broad spectrum of asset classes that spans hedge funds, private markets (both equity and credit), infrastructure, and real estate. Hedge funds represent the most liquid end of the alternatives spectrum, with high quality hedge funds available in monthly and even daily liquid format.

Hedge funds tap listed markets to generate uncorrelated alpha streams and are complementary to other alternatives in a portfolio as a result, which means investors can use hedge funds to complement private alternatives with different liquidity and different risk drivers. It’s important to emphasise that unlike private alternatives, investors don’t need to give up liquidity to harness high quality alternative returns through hedge fund strategies.

Investors choose to allocate to hedge funds to achieve a return stream that is truly independent of both bonds and equities (for example a beta of 0.2 or less), as well as to inject portfolio ballast and reduce drawdowns, particularly given the uncertain nature of markets in recent years.

Within the hedge fund universe, clients can select a single strategy or multi strategy approach – what are the advantages and disadvantages of each?

Multi strategy hedge funds allocate to a range of hedge fund strategies in a single portfolio. Multi strategy platforms with data and risk infrastructure can reallocate quickly and manage correlation — a competitive edge versus siloed approaches. While single strategy hedge funds are specifically targeted to a particular hedge fund style, they rely on one single source of alpha or one opportunity set.

Multi-strategy hedge funds – particularly those constructed to have low correlation to equities and bonds, or “market neutral” funds - have benefitted from significant growth in recent years, in line with their top performance, as they’ve been able to remain nimble and harness evolving opportunity sets as the market has navigated recent macro volatility, dispersion and geopolitical risk.

Multi strategy hedge funds are highly diversified by design, and combined with a market neutral construction, can have more consistent returns and lower drawdowns that single strategy hedge funds. When thinking about the role of hedge funds in a portfolio, multi-strategy funds have a clear case: they blend well with equities and bonds given they are designed to be lowly correlated with broad markets. This means they can provide both portfolio ballast as well as attractive and unique return streams.

Globally, we’ve seen the hedge fund sector hit multi-decade highs last year in terms of both client inflows and performance. What has driven this turnaround after a period where hedge funds arguably fell out of favour as a product category?

We are no longer in the Great Moderation – the low inflation, low volatility world that defined the early 21^st century. The opportunity set for hedge funds as such has expanded as we’ve seen policy shifts, inflation uncertainty and geopolitics create wider dispersion and volatility.

When volatility and regime shifts rise, flexible strategies have more to do — and asset allocators have responded to that. Hedge funds have delivered their best industry returns since 2009 (~12.5% in 2025) with strong results from multi-strategy and macro hedge funds in particular¹. However one of the key benefits of hedge funds is their uncorrelated nature, not just their attractive returns.

A strong theme we’re seeing is investors turning to hedge funds where bonds may not necessarily be delivering the diversification they have done so in the past. Highly diversified multi-strategy hedge funds in particular are being used in this way.

Given their high diversification, they can have very low volatility – levels commensurate with bond volatility - yet with higher expected returns than bonds. As a result we see many investors turning to hedge funds to replace or complement bonds in their portfolio to act as a high quality diversifier to equities where perhaps bonds are no longer performing that role anymore.

Global hedge fund industry at a glance, 2025*

Historically, hedge funds have perhaps been seen as exclusively reserved for ultra high net worth investors. How has the industry evolved in recent years when it comes to aspects like fee structures and liquidity which may have restricted some wealth clients from participating?

Hedge funds are no longer reserved for Wall Street’s elite. Fee models have evolved with lower base fees and tighter hurdles on performance fees, as well as negotiated and founder share classes – far more appropriate fee levels for the outperformance these strategies are expected to generate for clients.

High quality multi-strategy managers can pass on highly negotiated fees to end investors. Look out for unique features such as performance fee netting terms, which ensure investors are not paying performance fees if they haven’t received any actual outperformance.

Daily liquid hedge funds - commonly referred to as “liquid alts” - have also come a long way in the last decade and have broadened access to high quality liquid hedge fund strategies with clearer liquidity terms. As an example, we would expect daily liquidity with no lock ups or gates for such funds.

This is all great news for investors. The binding principle for us is that fees for hedge funds need to be viewed in context: hedge funds aim to harness true uncorrelated outcomes and risk control, not index-beating returns. As such, what matters is the net contribution to the overall portfolio.

How have you seen clients typically use hedge funds in a portfolio- where can they be most effective?

We’re witnessing a significant resurgence in demand for hedge funds in portfolios across all types of investors – sovereign wealth funds, superannuation funds, and private wealth. Portfolios are evolving beyond the traditional “70/30” model of equities and bonds, with hedge funds playing a key role in a modern, high quality portfolio.

In a regime with persistent macro shocks and dispersion of returns across markets, investors need different engines of return that don’t live or die on the equity–bond trade. Hedge fund strategies give you tools – such as long/short, relative value, macro or systematic strategies - that can either reduce your exposure to the macro environment, or harness it with flexibility.

By adding a diversified multi strategy market neutral hedge fund to a traditional 70/30 portfolio, investors can achieve higher overall portfolio returns and lower overall portfolio volatility.

As multi-asset investors we spend a lot of time thinking about the role or the utility of hedge funds in a diversified portfolio of stocks and bonds. We see 3 key use-cases for hedge funds in the current environment:

1. Diversification: ‘diversifying your diversifiers’ across the whole portfolio by harnessing a low beta return stream in place of, or next to, bonds;
2. Risk mitigation: harnessing a defensive return stream that can help to navigate macro dispersion and market volatility and provide portfolio ballast, particularly in large market drawdowns; and
3. Alpha seeking: capturing the rich opportunity set in the current environment, where our capital market assumptions tell us that hedge funds are expecting higher returns than global equities.²

Our own BlackRock Investment Institute suggests a 5% allocation increase to hedge funds in a portfolio³. We notice that sizing often grows with governance capacity and with familiarity, but the key objective for most of our clients is diversification/uncorrelated return, not “beat equities every year”.

Enhance portfolio outcomes with the 70/15/15

The hedge fund space is relatively underdeveloped in Australia when it comes to products that are available to the wealth segment. What are the typical questions you get from wealth clients when educating them on hedge funds, and what most interests them about hedge funds as an investment opportunity?

Interest in hedge funds in the wealth segment in Australia is certainly strong and continuing to rise very quickly. Unfortunately, in Australia product access and education lag global peers, outside of some narrow bright spots which we like to think BlackRock is at the centre of.

Given our long tenure and seasoned team, we field many questions from clients who trust us to help them understand hedge funds and look under the hood. The key focus topics tend to be transparency, liquidity, performance during extreme market drawdowns, and the role of hedge funds in a portfolio (where to fund the allocation from – bonds or equities or a blend).

At BlackRock we’ve been advocating for high quality products for Australian wealth clients for over 20 years. Our view is that globally connected, locally available solutions such as our Global Liquid Alternatives Fund are well-designed institutional quality “on ramps” for Australian advisers and high net worth investors seeking to access this AUD$4 trillion market to improve portfolio outcomes for themselves and their clients.