hedge funds why invest now

Why hedge funds now?

Recent market volatility, sparked by the Iran war, underscores why diversification and downside protection are essential considerations when building an investment portfolio. 

In other words, the experiences of the past several months serve as reminder of why investors should always have some of their capital invested in hedge funds. 

Hedge funds play numerous roles in a diversified portfolio. They can boost its yield, they can preserve capital when markets are volatile and they can also deliver alpha that is beyond the reach of traditional long-only funds, capitalising on corporate transformations such as mergers and acquisitions.

Boosting yield is an especially important consideration at this point in the economic cycle. 

Investors’ need for yield can no longer be fully met by low-risk money market funds. And as interest rates have fallen worldwide, bond yields in developed markets have also become a less attractive source of returns (see Fig. 1 - Hunt for yield).

Many investors are now seeking new sources of return to meet their objectives. Some might be tempted to chase yield at any cost. But in doing so, they potentially take on additional - or new - risks within their portfolios, such as reduced liquidity or increased complexity.

We believe a more effective approach could be to allocate some of a portfolio’s capital to select hedge funds. Market neutral funds offer access to a wide range of instruments and investment techniques, can combine long and short positions and are also able to control volatility through active downside risk management.

Investors are increasingly taking note: according to a recent Goldman Sachs survey, hedge funds are the most sought-after strategy among asset allocators, surpassing long-only strategies and private assets. 

Hedge funds as an alternative to volatile stock markets

Beyond seeking yield, investors are also concerned about the risks building in global stock markets, after three years of approximately 20% returns per annum.

There is now little margin for error for equities, not least because of geopolitical uncertainty, as the conflict in the Middle East shows.  Unpredictable US trade policy and the breakneck expansion of AI further complicate matters.

Investors are thus looking for beta replacement – or an alternative to broad market exposure – in an effort to protect the gains they have accumulated.

Long/short equity strategies offer a more flexible approach, with returns driven by manager skill (alpha) rather than overall market direction (beta) movements, and with scope for some downside protection.

Capitalising on increased capital market activity

Hedge funds also offer investors the possibility to source excess returns that lie beyond the reach of traditional long-only equity funds. 

An increase in deal-making and corporate restructurings, such as mergers and acquisitions, initial public offerings and spin-offs, favours a particular group of hedge funds known as event-driven strategies. These aim to take advantage of announced and anticipated corporate events that affect the valuation of a security, be it in a positive or a negative way.

Global M&A volume surged by 40% in 2025 and the rebound is expected to continue (see Fig. 2 - M&A boom).Morgan Stanley Mergers andAcquisitions Outlook 2026This is mainly due to easing financing and regulatory headwinds and company boards using deals to adapt to AI, tech and supply chain shifts.

Interestingly, Asia has emerged as the most dynamic event-driven market globally. In Japan, for example, shareholder activism has reached historic highs, driving corporate transformations and genuine improvements in capital efficiency. During 2025, M&A activity in Japan soared to record levels. Similarly, South Korea has implemented the most comprehensive corporate governance reforms in its history, reshaping shareholder rights and board accountability. Hong Kong, meanwhile, has against all expectations reclaimed its position as the world's leading equity capital markets hub, ranking number one globally in IPO funds raised (at HKUSD286 billion in 2025).HKEX Group

Diversification in a time of higher correlations

The flexibility offered by hedge funds is particularly valuable during times of market volatility, when the need for diversification and risk management becomes more pressing.

Recent geopolitical events serve as reminder that in times of turmoil, seemingly disparate asset classes can move together. The unstable correlations between equities and bonds render traditional diversification frameworks less effective, particularly in times of heightened inflation concerns; we saw that in 2022 and we have seen it again now.

Investors looking primarily for diversification should focus on hedge fund strategies whose returns show little or no correlation with those of equities and bonds. In this category we find multi-strategy and equity market neutral approaches, such as Pictet’s Diversified Alpha.

Hedge funds as substitutes for equities or bonds

The other key role that hedge funds can play in an investment portfolio is that of substitutes for mainstream investments.  Certain types of strategies can effectively replace a portion of equity (or bond) investments whilst improving the risk/return profile – characteristics that appeal to investors concerned about stretched valuations, or those looking for a less volatile alternative to direct stocks exposure.

Directional long/short equity funds fall in this category. They aim to offer returns similar to those of equity markets but with less volatility and limited drawdowns. One example is Pictet’s Atlas Titan, which at least matches market returns during rallies while having a history of delivering capital preservation during times of stress. Our analysis shows that, over the past five years, investors would have achieved better performance and improved risk-adjusted returns (as measured by the Sharpe ratio) by replacing part of their traditional 60% equity, 40% bond portfolio with an allocation to Pictet’s Atlas Titan strategy.USD net returns, data coveringperiod31.01.2021-31.01.2026.

Similarly, Pictet’s Mandarin, a long/short strategy primarily focused on China, Hong Kong and Taiwan, provides an alternative for investors who are looking to take advantage of renewed opportunities in China. The strategy's managers focus investments in innovative companies while being conscious of the volatility that typically comes with emerging market investments.

Conservative multi-strategy funds can also be used to substitute bonds, improving the risk/return profile of a fixed income allocation.

In today’s volatile markets, hedge funds can thus play a key role in helping investors diversify their portfolios and manage risk, either as a complement to or substitute for traditional bond and equity investments.