Episode Description:
Hedge fund strategies are gaining renewed attention as market volatility rises and traditional stock and bond diversification becomes less reliable. With inflation uncertainty, shifting monetary policy, and growing macro instability, investors are reassessing how different sources of return and risk management show up across capital markets.
In this episode of The Bid, host Oscar Pulido speaks with Mike Pyle, Deputy Head of BlackRock’s Portfolio Management Group, about how hedge fund strategies work and why they are being re-examined in today’s environment. Mike explains what defines hedge fund strategies, how their flexibility seeks to allow managers to express views more precisely, and why they can play different roles within portfolios depending on investor objectives.
They explore common misconceptions around hedge fund strategies, including the idea that they are inherently high risk or designed solely to outperform equities. Mike outlines how these strategies span a wide range of risk profiles and can be used for diversification due to their potentially lower correlation to traditional assets. The conversation also examines why macro volatility since 2021 has created a more favorable backdrop for hedge fund strategies, and how their ability to either navigate or reduce macro exposure is shaping investor interest.
Key insights include:
• What hedge fund strategies are and how they differ from traditional investments
• Why lower correlation, not market outperformance, is often the core objective
• How higher volatility and macro uncertainty are reshaping portfolio construction
• How hedge fund strategies compare with other alternatives like private markets and infrastructure
• Why scale and multi-strategy platforms are changing the hedge fund landscape
Keywords: hedge fund strategies, capital markets, portfolio diversification, alternatives investing, market volatility, megaforces
This content is for informational purposes only and is not an offer or a solicitation. Reliance upon information in this material is at the sole discretion of the listener. Reference to any company or investment strategy mentioned is for illustrative purposes only and not investment advice. In the UK and non-European Economic Area countries, this is authorized and regulated by the Financial Conduct Authority. In the European Economic Area, this is authorized and regulated by the Netherlands Authority for the Financial Markets. For full disclosures, visit blackrock.com/corporate/compliance/bid-disclosures.
Oscar Pulido: Hedge funds have long carried an air of mystery, often seen as complex high risk. Reserved for Wall Street's elite. But that perception is starting to shift as markets become more volatile and investors search for new ways to diversify. Hedge fund strategies are stepping into the spotlight, and in some cases becoming more accessible than ever before. So, what exactly are hedge funds and why are they attracting fresh attention now?
Welcome to The Bid where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm Oscar Pulido.
Joining me today is Mike Pyle, deputy head of BlackRock's Portfolio Management Group. Together we'll unpack what hedge fund strategies really are, how they've evolved, and why this once exclusive corner of the investing world might be due for a rethink.
Mike, thank you so much for joining us on The Bid.
Mike Pyle: Thanks for having me. It's a real pleasure.
Oscar Pulido: Mike, today we're going to introduce a new topic. We're going to talk about hedge fund strategies, and I'd love to start by getting an overview from you about what exactly is a hedge fund strategy. If you're an everyday investor and you've never heard of them before, how would you best describe them?
Mike Pyle: So, I'd say that hedge fund strategies, first of all, not monolithic, they're pretty heterogeneous. But what pulls them together, or what makes them a common category, is that they all give their portfolio managers a pretty wide range of tools to use to express their views. The ability to go long and short, the ability to use to derivatives, to manage risk among other things. And if you take a step back, why does that matter?
I often begin a lot of conversations when I think about investing with the thoughts of my friend and our colleague Ron Kahn, who literally wrote the book on quantitative investing. And he talks about the fundamental law of active management where the ability of an investor to outperform turns on three things.
Turns on their forecasting skill, turns on the number of different forecasts that they have, their breadth and then turns technically on what's called their transfer coefficient or, to put it more simply, the ability of an investor to translate their views into assets that they own in a portfolio.
And if you think about it, it's really this transfer coefficient that gives hedge funds their edge, the ability to more efficiently, more precisely express the forecasts, express the independent views of a portfolio manager into their portfolio by virtue of giving them more tools to express those views.
Oscar Pulido: And so, it sounds as you're describing hedge fund strategies, I'm thinking of the word flexibility. you mentioned breadth, but it sounds like it gives a portfolio manager flexibility to express their views in a lot of different ways.
A lot of ways to then generate return. In saying that it sounds like hedge fund strategies could be a great alternative addition into a portfolio, but I think there might be a lot of investors out there whose idea about hedge funds, they've seen stuff in the media, maybe there are some myths that you can help us, debunk, when it comes to some of the misconceptions that people might have about hedge fund strategies.
Mike Pyle: I think that's exactly right, Oscar. Obviously, investors need to do a lot of work to identify strategies that are going to work for them and what their objectives are in a portfolio. A lot turns on choosing managers a lot turns on continuing to monitor those portfolios to ensure that they're delivering what they want.
But I do think that, exactly as you said, there are a set of myths that tend to go along with people's conceptions of hedge funds and hedge fund strategies. The first I would say is that these are by their nature, high risk portfolios. And the fact of the matter is there are a range of different types of portfolio strategies and a range of different risk levels that those portfolios are run out. So, for example, some investors use hedge fund strategies really as very return seeking strategies. They see them as a compliment to, or a substitute for their stock, their equity allocations, other investors, and we see this a lot, in the conversations that we have with investors are looking to hedge fund strategies to replace fixed income allocations.
And those are of course, much lower risk, lower volatility strategies than those that are intended to replace or substitute for equity allocations. And so, I’d say that's the first misconception. The second, again, it related is this idea that hedge funds are there to beat the stock market, that that's what hedge fund strategies are for, and I think that this kind of rhymes with the answer to the first one, but really gets again, to this kind of core point of what do hedge fund strategies deliver. And most of what they deliver in addition to return is lower correlation. That sort of idea of stocks and bonds are out there performing in market day in and day out, and hedge fund strategies can offer a distinct source of return that has relatively low correlation both to traditional stocks and traditional bonds, and it’s that lesser correlation that makes it potentially a really powerful addition to a portfolio.
And then I think the third misconception is that hedge fund strategies are really just the remit of the most sophisticated institutional investors. Certainly, historically that's been the case. Certainly, sophisticated institutional investors are still principally, the most significant consumers of hedge fund strategies. But I think we're increasingly seeing hedge fund strategies become more accessible to retail investors in forms and wrappers that they're more accustomed to, things like mutual funds and ETFs. And so, I think those are three misconceptions that are generally out there, but that are pretty important to dispel when talking about this class of investments.
Oscar Pulido: And that's really helpful. This theme of access has actually been a recurring theme with guests on The Bid when it comes to capital markets, and it seems like there's more and more access for investors to exploit the investment opportunities in capital markets. But you also mentioned, just to go back to some of the things you touched on earlier, that hedge fund strategies can be very heterogeneous, meaning they come in different. of shapes and sizes and risk profiles. And hence why some investors might use them as a substitute for stocks, but some might use them as a substitute for bonds.
Mike, all that background's very helpful. I'm curious though, why is it that now, at this point in time and in this sort of market environment, is the interest in hedge fund strategies picking up? Why are we having this discussion at this point?
Mike Pyle: Yeah, so I'll make a very specific answer and then offer a broader one. I think the specific one goes a little bit to this point around fixed income replacement. So I think in a world where, for a range of macroeconomic reasons, whether it's fiscal deficits around the world, whether it's, sticky, inflation, the experience of inflation over the past couple of years, whether it's greater uncertainty around policy frameworks like from Central Bank and fiscal policy makers, I think there's more uncertainty today than there has been in some time about the role that government bonds are going to play in portfolios and in particular the diversifying role that government bonds can play in portfolios.
And so, I think in that world, investors are seeking, alternative strategies that can have a lesser or lower correlation to the broad market as alternative sources of diversification in their total portfolio in a world where, again, government bonds maybe aren't playing or going to play the same role that they have historically. But I think that kind of broadens out then into more general set of observations, which is the macroeconomic environment is more unstable, more uncertain, than it has been certainly over the last 15 years post the GFC, but maybe for a much longer sweep of history than that. Again, some of the reasons I cited uncertainty around monetary and fiscal policy frameworks, geopolitical and trade fragmentation, the rise of transformative mega trends like AI, all of these are inserting huge sources of uncertainty and instability into the macro environment in ways that make investing through traditional and stock and bond allocations, more uncertain and hedge funds are able to, I think, step into that void.
One of the things that our colleagues, in the BlackRock Investment Institute wrote about this past year was saying macro is destabilized, but macro is also unavoidable. And there are really two ways of going about managing portfolios in this macroeconomic environment. One is to embrace the macro, to identify skilled managers who can, navigate, macro currents that are, highly volatile, highly uncertain, and have demonstrated skill in doing so. The other is to seek to dial down that macro risk to zero, to identify sources of macro risk and to run portfolios, oftentimes systematic portfolios that can really dial that risk down and take it out of portfolios. And as we look across the landscape in 2025, you look at the industry, those are really the types of hedge fund strategies that had significant, performance across the year, and I think it's reflective of the broader environment that we're a part of and reflective of why investors are turning to these strategies today.
Oscar Pulido: Maybe just a quick follow up question - is it a coincidence or is it in fact part of the reason why we're talking about hedge fund strategies in this period post 2021, I’m thinking about when interest rates went up in 2022 and volatility picked up and we started talking a lot more about these mega forces is a period of higher volatility and more macro volatility as part of that favorable to hedge fund strategies?
Mike Pyle: Yeah, I think that's exactly right. in some ways it's exactly right both kind of coming and going. The period of the 2010s which was a period appropriately of extraordinary monetary policy were one of the objectives of policymakers and one of the results of it was to pin interest rates to the ground and to dampen market and other forms of volatility as a result. That was an environment where the opportunity set for managers of hedge fund strategies, because of that low dispersion was relatively low. Having the flexibility, having the tools that hedge fund managers have at their disposal wasn't as valuable in a world where volatility is low, dispersion is low, interest rates are pinned to the ground. I think exactly to your point, post 2021, a world where that environment is turned on its head, where market dispersion is considerably higher, that offers a much different and much more substantial opportunity set for investors. And that flexibility, that toolkit, that managers of head fund strategies are able to bring to the table is more valuable has real potential embedded in it.
Oscar Pulido: Mike, if you've followed us on The Bid, you know that we've talked about things like private markets, we've talked about infrastructure, we've talked about gold and crypto, and all of these are assets that we have broadly talked about them as alternatives to the more traditional stocks and bonds that tend to live in a client's portfolio. How do hedge fund strategies compare or sit alongside some of these alternatives?
Mike Pyle: Not unlike hedge fund strategies themselves, alternative investments come in a bunch of different shapes and sizes and serve different roles in a portfolio. and so, I think when you talk about, something like private market exposures, you're really looking to harness in your portfolio illiquidity premia that aren't available in public markets.
when you look at, things like. Gold When you look at things like, Infrastructure assets. These tend to be alternative exposures that are more inflation hedging, and allow a portfolio to have, greater protection against the type of instability that can come in markets from inflation. I think hedge fund strategies are yet another category, what they're seeking to do is generate a source of return that has lower or lesser or low correlation to other assets. That's inclusive of stock and bonds, it's also inclusive of other forms of alternative investments, like a gold, like a crypto, like private markets, and so that correlation that's the key feature I think, driving hedge fund strategies in general and offering a vector of return different than stocks and bonds, different than other alternatives that can be additive in a portfolio context as a result.
Oscar Pulido: And Mike, I think you touched on this a little bit, you started talking about how hedge fund strategies can come in a lot of different flavors and, styles. When we think about how hedge fund strategies generate returns, is there one way they do it or are there a lot of different tactics that are employed? What do you observe when you look at the industry?
Mike Pyle: Yeah, again, I just go back to that touchstone of this is not a monolithic space. This is quite a heterogeneous one. Whether you have managers employing long short equity strategies, using the tools of being able to go both long and short to identify sources of outperformance, both from stocks that are appreciating more rapidly than the market, and those that are underperforming on the short side, whether you're talking about macro strategies and navigating the types of forces around growth, inflation, and policy that characterize the macro environment, whether you're talking about something like event driven strategies and looking at corporate events like mergers and acquisitions as sources of return and the volatility around those events as sources of return. There are a bunch of different flavors of hedge fund strategy out there. One that I would highlight, and I think is an increasingly important part of the broader hedge fund ecosystem are so-called multi-strategy hedge funds that deploy a bunch of different types of strategy, long short equity, macro event driven much else besides all underneath one roof.
And, to take a step back and talk again in terms of the theory of portfolios, it makes a kind of sense. What's better than one uncorrelated stream of alpha? Well, a bunch of different, uncorrelated streams of alpha all within one portfolio offering the benefits of diversification, offering the benefits of potential higher risk adjusted return as a result of having those different streams of alpha all in one book, lowering risk at the portfolio level through diversification and increasing risk adjusted return potentially as a result.
Oscar Pulido: We've talked about what's changed in the market environment that has brought the topic of hedge fund strategies forward a bit. Now it's volatility, its investors looking for different sources of diversification, the role that macro is playing in the environment and investors trying to navigate that. But I'm curious how have industry and investor dynamics and really attitudes towards hedge fund strategies evolved over time.
Mike Pyle: Yeah, I think you get one of the big themes, which is just the different market environment and as a result of that, different in market environment, investor needs, what they need from, what they need from different strategies.
But I think you're exactly right that just the industry landscape as a whole has shifted quite a bit over the last 10 or 15 years. And I'd highlight two things. One is the way in which scale is just much different as a driver of the hedge fund industry than was the case 10 or 15 years ago. If you rolled back the clock a decade ago, alpha in hedge fund strategies was really viewed as the province of bespoke niche, small scale, managers delivering within a kind of narrow area of the market that they knew extraordinarily well and were able to generate alpha by virtue at some level of being very focused, very niche. Scale, size, these were viewed as the enemies really of delivering hedge fund alpha.
You roll the clock forward 15 years, roll the clock forward through the rise of what we were talking about earlier, the multi-strategy space. And really that's been turned on its head where you now see scale. As an asset scale, as something that facilitates and helps to deliver a hedge fund alpha whether it's bringing multiple strategies under one roof, whether it's advantages from scale around technology and data scale in terms of trading liquidity, scale. In terms of risk management, it's really been a quite a turning of the coin onto a different side over the last 10 or 15 years from a world of bespoke single strategy hedge funds to a world of highly scaled, multi-manager, multi-strategy context, which is just a much different inflection to the industry overall.
Oscar Pulido: Mike, we've heard a lot about hedge fund strategies today from you, you've taken us, through a little bit of the history and why they're relevant today, we've done some myth busting, which I think was really helpful. But what are some of the things that investors should take away and consider from our conversation?
Mike Pyle: Yeah, I think in some ways, this is an environment that is particularly well suited for the flexibility that hedge fund strategies can bring to bear. It's also a macroeconomic environment where seeking alternative sources of return, importantly, alternative sources of diversification, through the lower correlation of hedge fund strategies can be very powerful for investors in portfolios.
It's a moment where the accessibility of hedge fund strategies is different than it has been, historically. At the same time, these are strategies that do carry inherent risk. And it's really important for investors to be thoughtful around their objectives. thoughtful around the types of strategies they have at their disposal to be thoughtful and careful when choosing managers and to be, always monitoring to ensure that the strategies they're deploying are meeting their objectives in the here and now and over time.
But I think, again, bottom line for a range of the reasons that we've talked about, it's a pretty important moment in the evolution of hedge fund strategies and the role that they can play in the portfolios of a bunch of different types of investors.
Oscar Pulido: Well, we started our conversation with the notion that hedge fund strategies might feel to some people as a corner of the market that is only for more sophisticated investors, or, maybe not for the average investor, but you've helped us understand how in fact it is becoming more relevant to more investors and a unique way to diversify in this kind of environment. Mike, thank you for sharing all these great insights on hedge fund strategies and thanks for doing it here on The Bid.
Mike Pyle: Thanks, Oscar.
Oscar Pulido: Thanks for listening to this episode of The Bid. If you haven't already, check out episodes 213 and 239 on private markets where we discuss how the asset class could reach a value of 32 trillion by 2030.
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This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities, funds or strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of the date of publication and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. BlackRock does and may seek to do business with companies covered in this podcast. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of this podcast.
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