Hedge Fund Solutions

Hedge fund opportunities

In a rising rates and uncertain market environment

Key takeaways


Embracing volatility

Hedge fund strategies that seek to provide liquidity and price risk opportunistically appear back in vogue after years of quantitative easing suppressing volatility.


Diversification benefits

We expect the outlook for a thoughtful allocation to hedge funds to improve on both an absolute and risk-adjusted basis, while their diversification benefits become increasingly important to a whole portfolio.


Manager selection

As the dispersion in hedge fund returns continues to rise, we believe selecting the right managers is critical and underscores the importance of having an experienced, well-resourced team to source the best funds.

The tide is turning for hedge funds

There’s a new regime in financial markets and that means conditions are also shifting in the hedge fund landscape.

Interest rates have risen at the fastest pace in recent memory from the ultra-low levels experienced for much of the last 15 years. We believe higher rates bode well for hedge funds going forward. Rising rates should not only translate to higher baseline returns for many hedge fund strategies but also create more opportunities for hedge fund managers, given their natural role as liquidity providers and opportunistic investors.

Quantitative easing suppressed volatility for years, making it difficult for strategies seeking to provide liquidity and opportunistically price risk. But we now see quantitative tightening bringing those opportunities to the forefront again, while upending risk/return expectations across asset classes.

With our decades of experience investing in hedge funds, we see two key factors leading to an improved outlook for hedge funds: higher risk-free rates and greater absolute return spreads.

Hedge funds have performed better in higher risk-free rate environments

Hedge funds chart

Past performance does not guarantee or indicate future results. Source: Morningstar as of 30 June 2023. Median index return since 1 January 1994. Hedge Funds are represented by the Credit Suisse Hedge Fund Index, Event Driven by the Credit Suisse Event Driven Index, Long/Short Equity by the Credit Suisse Long/Short Equity Index, Global Macro by the Credit Suisse Global Macro Index, and Multi-Strategy by the Credit Suisse Multi Strategy Index. Index performance is for illustrative purposes only and is not meant to represent the past or future performance of any particular BlackRock fund. Indexes are managed and it is not possible to invest directly in an index.

Embracing elevated uncertainty

Broadly, we believe hedge funds remain well-positioned to adapt to a shifting and increasingly uncertain economic outlook.

These strategies have reaffirmed over recent years that they can be truly uncorrelated and play a critical role in a whole-portfolio context. In addition to rising rates, we expect uncertainty around persistent inflation, tighter credit conditions, and the specter of recessions to be driving forces behind near- to medium-term market moves.

For example, in an era of tightening financial conditions, economic damage has the potential to manifest rapidly in unanticipated market segments. Financial cracks from the fastest rate hiking cycle in decades have already emerged in the banking sector, impacting the supply of credit.

While these conditions can present challenges for buy-and-hold strategies, they often create opportunities for hedge funds that utilize more agile, tactical, and diversified approaches to investing.

Highest dispersion in decades

We believe in the current environment, investors that are less constrained and able to pivot quickly will be rewarded. In this new regime, we should continue to expect a wider range of possibilities. Portfolio construction and implementation will be critical.

But choosing the right mix of hedge funds remains key. There continues to be a significant degree of return dispersion across hedge funds: the top decile of the HFRI Fund Weighted Composite Index gained 39% on average in 2022, while the bottom decile fell 33% on average. That’s the widest performance gap since 20081. This wide range of fund performance underscores the importance of an experienced and well-equipped team capable of sourcing the most skilled and resourceful managers.

Source: HFRI Indices December 2022 Performance Notes, ©HFR, Inc., 9 January 2023


Mark Woolley
Chief Investment Officer - BlackRock Hedge Fund Solutions

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