Hedge Funds Are Poised for a Comeback. Is Your Portfolio Ready?

“Well, I won’t back down
No, I won’t back down
You could stand me up at the gates of hell
But I won’t back down

No, I’ll stand my ground
Won’t be turned around
And I’ll keep this world from draggin’ me down
Gonna stand my ground
And I won’t back down“

By Scott Welch, CIMA®, CEPA®, Chief Investment Officer & Partner

Reviewed by Carter Mecham, CMA®, IACCP®

Why Diversifying Strategies Went Out of Vogue

From the end of the Great Financial Crisis (GFC) in 2009 until very recently, hedge funds, or more broadly diversifying strategies, have been distinctly out of favor.

Why?

Put simply, these strategies are designed to increase the diversification of the overall portfolio by delivering return streams with lower volatility and lower correlations to stocks and bonds. The explicit intent is to “smooth out” portfolio returns and deliver a more consistent overall portfolio risk/return profile.

Whether built as a diversified mix of strategies or bundled together into a Fund of Funds (FoFs) or multi-strategy fund, these strategies are designed to lower the volatility of the overall portfolio.

But in the post-GFC market regime, we were operating in a by-design low-interest rate, low-volatility environment, and these strategies delivered muted returns in response. Given their lower liquidity characteristics and fee structure, which is typically higher than traditional strategies, diversifying strategies fell out of favor as an example of the “deworsification” of a portfolio.

For almost ten years many investors have simply enjoyed riding the “beta wave” of a strongly rallying stock market and a low-yielding but predictable bond market.

But we believe the market regime is shifting or has already shifted. Bond yields are rising, volatility is creeping back into the market (slowly), and geopolitical uncertainties are causing investors to seek more stability in their portfolios.

This is what diversifying strategies are explicitly designed for, and we believe they may enjoy a renaissance as we move through the next market cycle.

So, let’s revisit them – remind ourselves what they are, what they are designed to do, and how to incorporate them into broader portfolios.

Don’t Call Me “Alternative”

The potential benefits of incorporating “non-traditional strategies” into diversified portfolios vary depending on the strategy. In the case of so-called “alternative investments” (long/short equity, global macro, managed futures, event-driven, option-based, etc.), the primary value proposition is lower correlation to traditional stocks and bonds, thereby potentially increasing the diversification of the overall portfolio.

But what do we really mean by “alternatives”? In our opinion, alternative investments are simply less constrained active management strategies.

In other words, there is nothing particularly “alternative” about them. They just have greater flexibility to deploy a variety of investment approaches.

Source: Fortigent and Certuity. For illustration purposes only. Does not represent investment advice.

Why Now for Diversifying Strategies?

Let’s begin by reminding ourselves of the concept of “economic regime investing” and attempting to build “all-weather” portfolios.

The phrase “all-weather” refers to building portfolios that have the potential to generate consistent performance regardless of the underlying economic and market regimes.

The simple schematic below illustrates the four primary phases of the economic cycle, based on whether the economy and inflation are increasing or decreasing.

We can then overlay this schematic with which types of investment strategies have the potential to perform best during which phase of the economic cycle.

Definitions: “Capital Growth” = Equity strategies, “Income” = Rate and Credit strategies, “Real Assets” = commodities, precious metals, real estate, infrastructure, MLPs, etc., “Volatility Management” = diversifying and private investment strategies. For illustration purposes only – does not represent investment advice.

Historically, we can see that diversifying strategies can and have added diversification to overall portfolios.

Source: Source: (left) Bloomberg, Hedge Fund Research (HFR), iCapital Alternatives Decoded, with data based on availability as of Nov. 30, 2025. Note: Data through September 2025 and is subject to change based on potential updates to source(s) database. Annualized volatility and returns are based on the trailing 20-years’ worth of monthly data. Hedge Fund Composite is proxied by HFRI Fund Weighted Composite Index. Multi Strategy is proxied by HFRI Relative Value Multi-Strategy Index. Macro proxied by HFRI Macro Index. Equity Hedge is proxied by HFRI Equity Hedge Index. Event Driven proxied by HFRI Event-Driven Index. Cash proxied by FTSE 3 Month US T Bill Index. Global Bonds proxied by Bloomberg Global Aggregate Bond Index. Global Equity is proxied by MSCI ACWI Index. Global 60/40 proxied by 60% MSCI ACWI Index and 40% Bloomberg Global Aggregate Bond Index. (right) S&P Capital IQ, iCapital Alternatives Decoded, with data based on availability as of Nov. 30, 2025. Note: Data through September 2025 and is subject to change based on potential updates to source(s) database. Hedge Fund Composite is proxied by HFRI Fund Weighted Composite Index. Global Bonds proxied by Bloomberg Global Aggregate Bond Index. Global Equity is proxied by MSCI ACWI Index. Global 60/40 proxied by 60% MSCI ACWI Index and 40% Bloomberg Global Aggregate Bond Index. For more information, please refer to the Index Definitions, Attributions, and Important Information sections at the end of this deck. For illustrative purposes only. You cannot invest in an index and past performance is not indicative of future results. Future results are not guaranteed.

We can next look at the current market environment. Investors enjoyed a remarkable equity market bull run for most of the past ten years. One consequence of that, however, is that global equity valuations are elevated relative to historical averages.

Source: Siblis Research (January 2026) and Advisor Perspectives / Shiller date (February 2026). The Shiller “CAPE” ratio is a long-term stock market valuation measure that compares current prices to the average of inflation-adjusted earnings over the past ten years. You cannot invest in an index and past performance is no guarantee of future results.

What is also true is that the future potential return on any investment is at least partially a function of how much you pay for it today. Given today’s elevated valuations, this suggests investors should expect much more muted returns going forward.

Source: Bloomberg, FactSet, IBES, Standard & Poor’s, Thomson Reuters, J.P. Morgan Asset Management. (Left) Valuation is calculated by summing 60% weight to earnings yield on the S&P 500 (inverse of forward P/E) and a 40% weight to the yield to worst on the U.S. Aggregate. Earnings yield is the forward earnings yield (consensus analyst estimates of EPS over the next 12 months divided by price) as provided by IBES since December 1984 and by FactSet since January 2022. (Right) Returns are based on a 60% weighting in the S&P 500 Total Return Index and a 40% weighting in the U.S. Aggregate Total Return index. 60/40 is rebalanced annually. Returns are 120-month annualized total returns, measured monthly, beginning 12/31/1984. You cannot invest in an index and past performance is not a reliable indicator of current and future results. JP Morgan “Guide to Alternatives,” data are based on availability as of January 31, 2026.

The other characteristic of many diversifying strategies is that, historically, they have performed best in periods of rising interest rates and rising market volatility (which helps to explain their mundane returns during most of the 2010s – a period marked by low volatility and low interest rates).

Source: Bloomberg Index Services Limited, Federal Reserve, Hedge Fund Research (HFR), MSCI, iCapital Alternatives Decoded, with data based on availability as of Nov. 30, 2025. Note: Data through September 2025 and is subject to change based on potential updates to source(s) database. Analysis looks at the average forward 12-month return when the upper bound of the Federal Reserve target rate was at or above 2.5% or below 2.5% since January 1990. Hedge Fund Composite is proxied by HFRI Fund Weighted Composite Index. Equity Hedge is proxied by HFRI Equity Hedge Index. Macro proxied by HFRI Macro Index. Event Driven proxied by HFRI Event-Driven Index. Multi-Strategy proxied by HFRI Relative Value Multi-Strategy Index. Global Equity is proxied by MSCI ACWI Index. Global Bonds proxied by Bloomberg Global Aggregate Bond Index. For more information, please refer to the Index Definitions, Attributions, and Important Information sections at the end of this deck. For illustrative purposes only. You cannot invest in an index and past performance is not indicative of future results. Future results are not guaranteed.

While volatility has come down after spiking at the start of the war with Iran, we believe we are entering a longer-term market regime that will be characterized by higher volatility and generally rising rates.

Source: Ycharts, 10-year data as of April 14, 2026. You cannot invest in an index and past performance is no guarantee of future results.

If we look back historically, we see that diversifying strategies delivered the lower correlations they are supposed to in periods of market turbulence.

Source for the previous two charts: (Top): Source: Bloomberg, CBOE, FactSet, MSCI, PivotalPath, Standard & Poor’s, J.P. Morgan Asset Management. Monthly VIX reading is an average. 60/40 portfolio = 60% S&P 500 Total Return Index and 40% Bloomberg U.S. Aggregate Total Return Index. Macro hedge fund relative performance is since 1/31/2000. Numbers may not sum to aggregate total return due to rounding. Global equity index = MSCI All Country World Index. (Bottom): Bloomberg, FactSet, HFR, Standard & Poor’s, J.P. Morgan Asset Management. 60/40 portfolio is 60% S&P 500 and 40% Bloomberg U.S. Aggregate. Hedge funds are represented by HFRI Macro. You cannot invest in an index and past performance is not a reliable indicator of current and future results. Guide to Alternatives. Data are based on availability as of January 31, 2026.

In calendar year 2025, diversifying strategies delivered as expected, generating consistent returns with volatility somewhere between that of stocks and bonds.

Source: FEG, “Fourth Quarter 2025 Market Summary”. You cannot invest in an index and past performance is no guarantee of future results.

Source: HFR (HFRI) indices, calendar year 2025. Event Driven results from Canoe/Citco. You cannot invest in an index and past performance is no guarantee of future results.

While so-called “liquid alternatives” (hedge fund strategies embedded into a mutual fund structure) typically deliver lower performance than their less leverage-constrained hedge fund cousins, they too delivered “as expected” performance in 2025.

Source: Wilshire Investments, as of December 31, 2025. The Wilshire Liquid Alternative Index℠ measures the collective performance of the five Wilshire Liquid Alternative strategies that make up the Wilshire Liquid Alternative Universe. Created in 2014, with a set of time series of data beginning on December 31, 1999, the Wilshire Liquid Alternative Index (WLIQA) is designed to provide a broad measure of the liquid alternative market by combining the performance of the Wilshire Liquid Alternative Equity Hedge Index (WLIQAEH), Wilshire Liquid Alternative Global Macro Index (WLIQAGM), Wilshire Liquid Alternative Relative Value Index (WLIQARV), Wilshire Liquid Alternative Multi-Strategy Index (WLIQAMS), and Wilshire Liquid Alternative Event Driven Index (WLIQAED). You cannot invest in an index and past performance is no guarantee of future results.

Given the “whipsaw” nature of market forces so far in 2026, some diversifying strategies have suffered right alongside traditional long-only markets, but we still believe they have a key role to play in diversified portfolios going forward.

More specifically, if we exclude “cryptocurrency” in the chart below (which we believe is appropriate for the purposes of this discussion), we see positive results in all major strategy categories except for the directionally-oriented equity long/short index – that is, these strategies are doing exactly what they are supposed to.

Source: HFR, YTD as of April 8, 2026. You cannot invest in an index and past performance is no guarantee of future results.

As with all non-traditional strategies, manager selection is critical. Top quartile managers tend to remain top quartile managers far more consistently than traditional long-only managers.

Put differently, if you cannot access top quartile managers, the expected return of these strategies is probably not worth the typically higher fee structure and lower liquidity profiles of these strategies.

Source: Source: PivotalPath, J.P. Morgan Asset Management. Manager dispersion is based on monthly returns for hedge funds. Green bar denotes median. All hedge funds: Fund Weighted Composite Index, Equity hedge: Equity Hedge (Total), Relative value multi-strategy: Relative Value Multi-Strategy, Emerging markets: Emerging Markets Global, Relative value: Relative Value (Total), Event-driven: Event-Driven (Total), Equity market neutral: Equity hedge – equity market neutral, Macro total: Macro (Total). You cannot invest in an index and past performance is not a reliable indicator of current and future results. Guide to Alternatives. Data are based on availability as of January 31, 2026.

Incorporating Diversifying Strategies into Overall Portfolios

It is important to remember that there is no single “best” hedge fund. Just like with traditional long-only investments, diversification is critical.

Source: Bloomberg Index Services Limited, FTSE Russell, Hedge Fund Research (HFR), MSCI, iCapital Alternatives Decoded, with data based on availability as of Nov. 30, 2025. Note: Data through September 2025 and is subject to change based on potential updates to source(s) database. Hedge Fund Composite is proxied by HFRI Fund Weighted Composite Index. Multi-Strategy proxied by HFRI Relative Value Multi-Strategy Index. Macro proxied by HFRI Macro Index. Equity Hedge is proxied by HFRI Equity Hedge Index. Event Driven proxied by HFRI Event-Driven Index. Credit proximity by HFRI Credit Index. Cash proxied by FTSE 3 Month UST Bill Index. Global 60/40 proxied by 60% MSCI ACWI Index and 40% Bloomberg Global Aggregate Bond Index. It is important to note that the returns listed are based on indices that are meant to estimate the asset class performance, hypothetically creating a return if one had access to all active funds. Not all the above indices are practically investable and are subject to change as datasets are continually updated. All returns are calculated in U.S. dollars. For more information, please refer to the Index Definitions, Attributions, and Important Information sections at the end of this deck. For illustrative purposes only. You cannot invest in an index and past performance is not indicative of future results. Future results are not guaranteed.

When incorporating diversifying strategies into portfolios, we suggest “reimagining” what it means to build a “core/satellite” portfolio, where in this case the satellite investments are the diversifying strategies.

Source: Fortigent and Certuity. For illustration purposes only – does not represent investment advice.

Because investing directly into single-strategy funds is beyond the prudent reach of most individuals, fund of funds (FoFs) and multi-strategy funds (MSFs) remain the primary access vehicles for most non-institutional investors.

So, the question naturally arises: “Which is better?” The answer, of course, is, “It depends.” The following is a summary of the potential strengths and weaknesses of each structure.

Comparing FoFs with MSFs

Source: Fortigent and Certuity. For illustration purposes only – does not represent investment advice.

Given the fee layers associated with most FoFs, multi-strategy funds have become the vehicle of choice for most non-institutional investors seeking a diversified mix of strategies in a single investment vehicle.

One potential benefit of FoFs, however, is that many managers have launched interval fund versions of their FoF, which are accessible to a wider swath of potential investors (i.e., accredited investors).

Most multi-strategy funds, on the other hand, remain Limited Partnerships and therefore limited to “Qualified Purchasers” (QPs), which is a higher bar for access.

At the end of the day, every investment within a portfolio is there to serve a specific purpose. Toward this end, we recommend expanding the definition of “alpha” beyond simply potential excess return generated by active management (though, of course, that is an absolutely legitimate definition of alpha).

We recommend investors and advisors think of their portfolios in a “multi-alpha” framework, where every investment is servicing a specific purpose within the overall portfolio.

Building a “Multi-Alpha” Portfolio

Source: Fortigent and Certuity. For illustration purposes only – does not represent investment advice.

Summary & Interpretation

We maintain our high conviction that diversifying strategies can and should play a key role in building “all-weather” portfolios. This approach, we believe, has the potential to deliver consistent performance over time, regardless of the underlying economic, market, and geopolitical regimes.

We are strategic investors and recommend portfolios built for the long-term – and diversifying strategies belong in them.

As always, we welcome your questions and feedback.